-Jimmy's utility of wealth schedule is given in the table above. Jimmy has a job with a one-third chance of earning $200 and a two-thirds chance of earnings $400. Jimmy's cost of risk is
A) $0.
B) $16.67.
C) $33.33.
D) Jimmy's cost of risk cannot be determined without more information.

Question

-Jimmy's utility of wealth schedule is given in the table above. Jimmy has a job with a one-third chance of earning $200 and a two-thirds chance of earnings $400. Jimmy's cost of risk is
A) $0. 
B) $16.67. 
C) $33.33. 
D) Jimmy's cost of risk cannot be determined without more information.

Quizplus · Accepted Answer

Jimmy's expected income is (1/3) * $200 + (2/3) * $400 = $333.33. His utility of this income is 0.8. If he were risk-neutral, he would be indifferent between his current job and a sure income of $333.33. However, since he is risk-averse, he prefers the sure income. The difference between his expected utility and his utility of the sure income is his cost of risk: 0.8 - 0.75 = $0.05.

-Jimmy's Utility of Wealth Schedule Is Given in the Table