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WOLFRAM|DEMONSTRATIONS PROJECT

Risk Premiums

​
measure of risk-aversion r
0
outcome amount
x
1
2
outcome amount
x
2
10
probability p
0.5
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
x
1
and
x
2
are the two outcome amounts,
p=Pr(state=
x
1
)
, and
r
is a measure of risk aversion in the equation
u(x)=100x-r
2
x
.
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