Consider a risk-averse individual with a utility of wealth
Consider a risk-averse individual with a utility of wealth function U(w) = w3 and initial wealth w = $7 faced with a risky investment. The asset has interest rate r = 10%. A capital gain g will result in an increase in the asset’s value by 60% while a capital loss I will result in a loss of 30% of the asset’s value.
The probability at of a capital gain is 65% and the probability 1 – π of a capital loss is 35%.
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