Are you sure?
Aaah. Dealing with uncertainty. Risk-management. That complicated jargon that only actuaries deal with. Here let’s keep it simple.
Question: “A risk-averse individual is offered a choice between a gamble that pays $1,000 with a probability of 1/4 and $100 with a probability of 3/4, or a payment of $325. Which would he choose? What if the payment were $320?
My Answer:
Question:
Suppose u(W) = –1/W. What is the risk attitude of this person?
Calculate the Arrow-Pratt measure of risk aversion for this preference.
To be continued…
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