Certainty equivalent as function of risk-aversion parameter
Explain Certainty equivalent as a function of the risk-aversion parameter.
Expert
When the wealth is random, and all outcomes can be assigned a probability, one can ask what amount of certain wealth has the same utility as the expected utility of the unknown outcomes. Simply solve
U(Wc) = E[U(W)].
The quantity of wealth Wc that solves this equation is called the certainty equivalent wealth. One is therefore indifferent between the average of the utilities of the random outcomes and the guaranteed amount Wc. As an example, consider the
Figure: Certainty equivalent as a function of the risk-aversion parameter
Figure demonstrates a plot of the certainty equivalent for example like a function of the risk-aversion parameter η. See how it decreases the greater the risk aversion.
Illustrates an example of Efficient-market hypothesis?
Explain the Jump-diffusion models in an option-pricing.
Illustrates an example of Option Adjusted Spread. Answer: Analyses by using Option Adjusted Spreads are common within Mortgage-Backed Securities (MBS).
How is gamma measure the rehedged position?
What are retained earnings? Why are they important?
Explain all mathematical laws under the condition of Central Limit Theorem.
Who introduced equity option formula for pricing interest rate options?
How is estimate of volatility or the implied volatility used?
Describe basic objectives of the Bretton Woods system?The basic objectives of the Bretton Woods system are to attain exchange rate stability and promote international trade & development.
Define the steps of getting governing equation of Girsanov’s Theorem?
18,76,764
1939045 Asked
3,689
Active Tutors
1436141
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!