Risk premium

Let ? = ??2 for w≥0.

a. Compute the exact risk premium if initial wealth is 4 and if a decision maker faces the lottery (−2 or+2, both with probability 0.5) Explain why the risk premium is negative.

b. If the utility function becomes ? = ? power 4, what happens to the risk premium? Show that v is a convex transformation of u

SAMPLE ASSIGNMENT

Sample-2

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