If Ann's utility function is U = 3W^0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her Arrow-Pratt measure of risk aversion is A)0.5/w. B)1/w. C)1.5w. D)3/w.

Question

Quizplus · Accepted Answer

The Arrow-Pratt measure of absolute risk aversion is given by -U''(W)/U'(W). For U = 3W^0.5, U'(W) = 1.5W^(-0.5) and U''(W) = -0.75W^(-1.5). Thus, the measure is -(-0.75W^(-1.5))/(1.5W^(-0.5)) = 0.5/W.

If Ann's Utility Function Is U = 3W0

If Ann's Utility Function Is U = 3W⁰