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Is David better off from diversifying his investments? What is the effect at work here? David prefers diversifying, because h

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Answer #1

The answer is (a)

David's utility funtion from the previous question = w0.5

Sinc this is a concave function, David is a risk-averse individual.

A risk-averse individual always prefers diversification as it reduces the risk of loss as compared to not diversifying. Thus, the answer is (A). All other options are incorrect as David is neither risk-loving nor risk-neutral.

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