I have a question regarding how i should calculate 3.2-3.4, currently studying for an exam. What i don't get is how to acctually derive the certainty equivalent from the expected utility of gross returns. 3.1: is that the expected return (1.075, 7.5%) = risk premium since the risk-free rate = 0.


3.2: As to my understanding the expected utility of gross returns should be calculated in this way: 0.5ln(80/100) + 0.5ln(100/135) = 1.0384. But how do i proceed from here? Since i need to use the power utility function.


I will skip 3.3 since it just ask what if A=8

3.4: What is a possible solution for this?


Thanks in advance!



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