Answer to Question #181219 in Finance for Justin

Question

True/False Statements: First, circle the right answer for the following statements, and then

provide your explanations. No marks will be awarded without correct explanations. (4 marks each) 1) If there is constant relative risk aversion, then there must be decreasing absolute risk aversion. True False

Answer 1

If there is constant relative risk aversion, then there must be decreasing absolute risk aversion.

Rr(y) = yRa(y), so Ra(y) = Rr(y)/y. If Rr(y) > 0 is constant, then Ra(y) is clearly decreasing in y.

So, the statement is true.