Suppose an asset has a risky return given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus believes the return on the asset is given by $\hat{x} \sim N\left(\mu, \hat{\sigma}^{2}\right)$, where $\hat{\sigma}\sigma$. Lulu believes the return on the asset is given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus and Lulu have the same risk averse preferences. Which of the following is true?
A) Gus requires a larger risk premium on the asset than Lulu.
B) Lulu requires a larger risk premium on the asset than Gus.
C) Gus is more likely to purchase the asset.
D) Gus and Lulu require the same risk premium.

Question

Suppose an asset has a risky return given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus believes the return on the asset is given by $\hat{x} \sim N\left(\mu, \hat{\sigma}^{2}\right)$, where $\hat{\sigma}>\sigma$. Lulu believes the return on the asset is given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus and Lulu have the same risk averse preferences. Which of the following is true?
A) Gus requires a larger risk premium on the asset than Lulu.
B) Lulu requires a larger risk premium on the asset than Gus.
C) Gus is more likely to purchase the asset.
D) Gus and Lulu require the same risk premium.

Quizplus · Accepted Answer

The Answer of Suppose an asset has a risky return given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus believes the return on the asset is given by $\hat{x} \sim N\left(\mu, \hat{\sigma}^{2}\right)$, where $\hat{\sigma}>\sigma$. Lulu believes the return on the asset is given by $x \sim N\left(\mu, \sigma^{2}\right)$. Gus and Lulu have the same risk averse preferences. Which of the following is true?
A) Gus requires a larger risk premium on the asset than Lulu.
B) Lulu requires a larger risk premium on the asset than Gus.
C) Gus is more likely to purchase the asset.
D) Gus and Lulu require the same risk premium.

Suppose an Asset Has a Risky Return Given By x∼N(μ,σ2)x \sim N\left(\mu, \sigma^{2}\right)x∼N(μ,σ2)

Suppose an Asset Has a Risky Return Given By $x \sim N\left(\mu, \sigma^{2}\right)$