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konstantin123 [22]
3 years ago
5

Nina has a convex utility of wealth function, u(x). She is contemplating two prospects, L and M, where L is a mean preserving sp

read of M. Which of the following statements is therefore true?
a. Nina will prefer M to L.
b. Nina will prefer L to M.
c. Ninaâs ranking of L and M cannot be determined without more information.
d. Nina must be risk averse, but that is the most one can say.
Business
1 answer:
Lerok [7]3 years ago
6 0

Answer:

b. Nina will prefer L to M.

Explanation:

Convex utility of wealth indicates that an individual tends to be comfortable with taking risks.

A concave utility function shows an aversion for risk.

A mean preserving spread occurs when one variable has greater variance than another but they both have the same mean.

In the given scenario prospect L will have a greater variance than prospect M since it is a mean preserving spread.

Given Nina's risk taking preference she will most likely take prospect L that offers more variability over prospect M

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