RISK AVERSION

Risk Aversion

Risk Aversion

Answers to Questions

Question 1

Anna's absolute (Arrow-Pratt) risk-aversion

u (w) =

A (w) =

u' =

u '' =

A (w) =

A(w) =

Now, Anna's absolute risk aversion at 16 wealth is

A (w) = = Anna's relative risk aversion is

R (w) = c A (w) (where c is the wealth)

If the wealth is doubled then

The change in the risk aversion when the wealth is doubled

A (w) = =

The risk aversion has decreased when the wealth is doubled.

R (w) = 32 = 1

The above calculation shows that relative risk aversion is constant with respect ...