AccountingEva is considering what major to study in college. Her utility function is basedon the income she earns, and is defined by U(I) = 10.7. If she majors inmetalworking, she will earn $120,000 per year with probability 1. If she majorsin finance, she will earn $250,000 per year with probability 0.5 (assuming themarket goes well) and $45,000 with probability 0.5 (if the market tanks and shehas to go move in with her parents and work at as an SAT tutor).1. Is she risk averse, risk neutral, or risk loving? Explain.2. Write out the equation for her expected utility for each major3. Which major will she pick? Show your work.4. Suppose someone offers her insurance for the possibility that the markettanks. This insurance will provide her an amount of income in addition to thewages that makes her indifferent between metalworking and finance. What isthis amount, and what is the cost of the insurance? (note: many possibleansword)

SOLUTION:- 1. u(I)=I 0.7 R(A)= -(UI /UII ) R(A) >0 THEREFORE she is risk averse because…

Answered: 1. Is she risk averse, risk neutral, or…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 9FPE

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