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