-John's Utility of Wealth Curve Is Shown in the Above

question 180

Multiple Choice

-John's utility of wealth curve is shown in the above figure. He currently has wealth of $20,000 and there is a 10 percent chance of losing it all. John is

• A) willing to pay any price for insurance.
• B) willing to pay no more than $2,000 for insurance.
• C) willing to pay no more than $3,000 for insurance.
• D) willing to pay $5,000 for insurance.

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Definitions:

Standard Deviation

A statistical measure that quantifies the amount of variability or dispersion around an average.

Optimal

The most favorable or desirable condition, outcome, or level, often in terms of efficiency or success.

Minimum-Variance Portfolio

A portfolio constructed to achieve the lowest possible risk (variance) for a given rate of expected return, optimizing risk-adjusted returns.

Standard Deviation

A mathematical indicator of the spread or fluctuation of data points or returns on investments relative to their average value.