Figure 5.2.2 -The Individual Pictured in Figure 5.2.2

question 124

Multiple Choice

Figure 5.2.2
-The individual pictured in Figure 5.2.2:

• A) must be risk-averse.
• B) must be risk-neutral.
• C) must be risk-loving.
• D) could be risk-averse, risk-neutral, or risk-loving.
• E) could be risk-averse or risk-loving, but not risk-neutral.

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Definitions:

Expected Value

The weighted average of all possible values of a random variable, with weights being their respective probabilities.

Probability

A measure quantifying the likelihood of a specific event occurring, often expressed as a number between 0 and 1.

Von Neumann-Morgenstern Utility Function

A utility function that assumes individuals can rank their preferences under uncertainty, used in expected utility theory to describe choices.

Insurance

A financial product that provides protection against financial loss or harm, in exchange for the payment of a premium.