$\begin{array}{|l|l|l|l|l|}
\hline \text { Investment } & \text { A } && \text { B } \
\hline \text { State description } & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.25 & 0.75 & 0.25 & 0.75 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-Assume the information in the table regarding the probability and payoffs of assets A and B relates to an investor who has a log utility function.By how much will the utility of asset B exceed that of asset A for this investor?

Question

Quizplus · Accepted Answer

For investment A,the utility from the bad state is ln(200)= 5.298,and in the good state is ln(220)= 5.394.Therefore,given the probability of each state occurring,the expected utility from the investment is therefore (0.25)(5.298)+ (0.75)(5.394)= 5.370.Similarly,the expected utility from asset B is (0.25)(5.991)+ (0.75)(6.075)= 6.054.Therefore,the utility of asset B exceeds that of asset A by 6.054 - 5.370 = 0.684.

-Assume the Information in the Table Regarding the Probability and