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November 3rd, 2015, 01:38 AM   #1
Joined: Sep 2013

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"Mild" Risk Aversion

Suppose that the average investor in a hedge fund exhibits mild risk aversion
with utility function for wealth (x) of the form
u(x) = 3x 4/5
The average investor has an amount X invested in the fund, where 70% of X is
invested in risky capital assets and the remaining 30% is invested in "risk-free"
money-market assets. Assume that due to a recent crisis within the capital
markets there is now a 35% chance that the value of the risky capital assets
held by the average investor will decrease by 40% during the next few months.
(A) Verify both graphically and mathematically that the average investor
exhibits risk aversion?

Any good guides as to verify it mathematically? (the graphical part is fairly obvious)
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aversion, mild, risk

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