The Assumptions Concerning the Shape of Utility Functions of Investors

question 1

Multiple Choice

The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory.Conventional theory assumes that utility functions are __________, whereas prospect theory assumes that utility functions are __________.

• A)concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• B)convex and defined in terms of losses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• C)s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth; concave and defined in terms of wealth
• D)s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in terms of losses relative to current wealth

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Definitions:

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