Sally Kink Is an Expected Utility Maximizer with Utility Function

question 1

Multiple Choice

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p) u(c₂) , where for any x < 7,000, u(x) = 2x, and for x greater than or equal to 7,000, u(x) = 14,000 + x.

• A)Sally will be risk averse if her income is less than $7,000 but risk loving if her income is more than $7,000.
• B)Sally will be risk neutral if her income is less than $7,000 and risk averse if her income is more than $7,000.
• C)Sally will never take a bet if there is a chance that it leaves her with wealth less than $14,000.
• D)For bets that involve no chance of her wealth exceeding $7,000, Sally will take any bet that has a positive expected net payoff.
• E)None of the above.

Calculate nominal and effective rates of interest for ordinary annuities.

Assess the effective rate of interest on consumer financing options, considering promotional offers and compound interest.

Understand and calculate future values of investments with periodic contributions.

Apply the concept of the time value of money to determine the present value of future cash flows.

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Definitions:

Bond Portfolio Managers

Professionals who specialize in the strategic management of bond portfolios, aiming to maximize returns and minimize risks for investors.

Active

In finance, refers to a management strategy involving regular buying and selling of assets to outperform the market, opposite of passive strategies like indexing.

Coupon Rate

The annual interest rate paid on a bond, expressed as a percentage of the bond's face value, to its holders.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, typically expressed in years.