Risk Premiums

This Demonstration shows how the risk premium (RP) and the certainty equivalent (CE) change with the degree of risk aversion r, the amount of the awards, and the probabilities that the various states will occur. The variables (Subscript[x, 1]) and (Subscript[x, 2]) are the two outcome amounts, p = Pr(state=(Subscript[x, 1])), and r is a measure of risk aversion in the equation u(x)= 100x-r (x^2).

THINGS TO TRY

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Contributed by: John Horton

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