Answer to Question #181221 in Economics 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)

A risk-neutral investor will use first-order stochastic dominance as a decision criterion only if the return of the underlying assets is normally distributed.

True False

Answer 1

All risk-averse expected-utility maximizers (that is, those with increasing and concave utility functions) prefer a second-order stochastically dominant gamble to a dominated one. Second-order dominance describes the shared preferences of a smaller class of decision-makers (those for whom more is better and who are averse to risk, rather than all those for whom more is better) than does first-order dominance.

A risk-neutral investor will use second- order stochastic dominance as a decision criterion only if the returns of the underlying assets are normally distributed.

So, the statement is false.