Investor Risk Preferences Practice

Q1. Arrow–Pratt Review

Absolute risk aversion A(w) is defined as?

Q2. Relative Risk Aversion

Relative risk aversion R(w) relates to A(w) via which expression?

Q3. CARA Utility

For exponential utility U(w) = -e^{-a w}, how does absolute risk aversion behave?

Q4. CRRA Utility

For power utility U(w) = w^{1-γ}/(1-γ), what is relative risk aversion?

Q5. Risk Premium Approximation

For a zero-mean risk h with variance σ², the Arrow–Pratt approximation of the risk premium Θ is approximately?

Q6. Certainty Equivalent

For utility U and wealth w with risk premium Θ, the certainty equivalent CE satisfies?

Q7. HARA Parameters

Which parameter combination recovers exponential (CARA) utility from the HARA family?

Q8. Insurance Demand

Why do increasing absolute risk aversion (IARA) investors buy more insurance as wealth rises?

Q9. Portfolio Choice

Under CRRA utility with return R_f and risky return distribution, the optimal risky share in a mean-variance world is proportional to?

Q10. Behavioral Comparison

Prospect theory differs from expected utility primarily because?