Financial Economics Help

LightningBolt

Have a question I'm stumped on at the moment and my the answer is prob staring me right in the face, anyway if anyone could answer this by 8 in the morning I'd be grateful!

Is the following Utility function, defined over wealth (Y), consistent with the theory of investment behaviour?

U(Y)= -exp(-yY)

Just a bried explanation or pointer to look up. Many thanks and I apologise for the seemingly stupidity of my post. Feel free to mock:o

Time Magazine

What's lower-case y represent? ln(Y)?

Actually, what's "the theory of investment behaviour"?

I suspect the question has to do with risk aversion/diminishing marginal utility. If y = ln(y), then u'(Y) might simplify to something nice, and you might get interesting relative and absolute rates of risk aversion.

(Or I could be miles off.)

Might help

http://en.wikipedia.org/wiki/Exponential_utility

I'd imagine you're supposed to discuss risk aversion.

LightningBolt

The Economist: yeah you were bang on with what you said!

Illegalheadbutt: Thanks!