# Uncertainty - June 20

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## Uncertainty - June 20

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## Re: Uncertainty - June 20

 Could u give a small hint?On Tue, Jun 19, 2012 at 9:23 PM, Amit Goyal [via Discussion forum] wrote: June20__Uncertainty.png If you reply to this email, your message will be added to the discussion below: http://discussion-forum.2150183.n2.nabble.com/Uncertainty-June-20-tp7578257.html To start a new topic under General Discussions, email [hidden email] To unsubscribe from General Discussions, click here. NAML
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## Re: Uncertainty - June 20

 E(Y+Z)=E(Y)+E(E(Z|Y))=E(Y)+0. so the expected values of both r equal. every risk averse individual would prefer Y to Y+Z coz they wont take additional risk if the expected value isnt increasing. risk neutral people would be indifferent. and risk loving people would prefer Y+Z. this means only statement 2 is correct. i know this is wrong. in fact i think the first step is wrong.
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## Re: Uncertainty - June 20

 Administrator Sure. For understanding, lets do the problem for the finite state space or sample space i.e. S = {s(1), s(2), ..., s(n)}. Y takes only two values y(1) and y(2) i.e. Y: S --> {y(1), y(2)}. And its given that Z is another random variable Z: S --> R. It is also given that Pr(Y = y(1)) = pi(1) and Pr(Y = y(2)) = pi(2). And we know that E(Z|Y) = 0. We can think of Y and Y + Z as two lotteries or gambles. The question asks you that if an individual has to choose between the two which one will he pick depending on his attitude towards risk?
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## Re: Uncertainty - June 20

 Hmm..so is what I did completely wrong?
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## Re: Uncertainty - June 20

 In reply to this post by Amit Goyal (iii) and (iv)
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## Re: Uncertainty - June 20

 In reply to this post by Amit Goyal I am getting same answers as vasudha.. expected returns of both are same. and risk in Y+Z is more.. So, just 2nd is true.