Note - so you can start making some progress on your projects and so you can do the background content for this Excel homework, I am having no Excel homework next week. This one is pretty easy. The next one after that is harder (but much more interesting). I will make these homeworks available early so if you want to progress faster you can.

This is the homework on the Math of Risk and Risk Preference. While you might be able to grind through it without viewing the content in the previous post, my expectation is that you will have done so. It will greatly increase your understanding of what is going on.

Also, if you are an eager beaver in the crowd and do the homework before class this Thursday (I applaud the eager beavers in the class) note that when you get to line 86 of the spreadsheet it says we have covered these ideas in class already. We should get to those ideas on Thursday, if only briefly.

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I have watched both videos and am getting confused how to find u(E(x)), I did not see its formula explicitly given. E(u(x)) formula was given in the video but I cannot figure out to how calculate u(E(x)), I am using cell references as well so it is just my algebra that is off. I know that u(E(x)) > E(u(x)) by a tiny margin because of concavity but I am not sure how to find it. Please let me know any hint/help when you can. Thanks.

ReplyDeleteNevermind that previous comment I got it. I am now having trouble getting the certainty equivalent... I cannot follow the formula explanation given leading up to answer box b67 very well I am not sure how to go from u -> v or make the inverse equations

ReplyDeleteI am seeing this a day late, and I see you have submitted the homework, so you must have gotten it. I will say that to understand the inverse of u given the particular utility function that we are using in this example, you need to understand the law of exponents. If you do understand that, then figuring out the inverse of u is straightforward.

ReplyDeleteI cant figure out how to solve u(x1) or u(x2), I watched the videos for help but I am still quite confused on how to solve them. I tried E(x)=Px1+(1-P)x2, but that didn't work. Am I using the wrong formula here?

ReplyDeletethe utility function is constant relative risk aversion u(x)= x^alpha. Did you try that?

DeleteI cant figure out how to solve u(x1) or u(x2), I watched the videos for help but I am still quite confused on how to solve them. I tried E(x)=Px1+(1-P)x2, but that didn't work. Am I using the wrong formula here?

ReplyDeleteCatch me after class if I don't cover it during the session. You need to be functional on this because the next homework depends on it.

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