Assignment:
A decision maker with a quadratic utility function of the form (13.12) is offered the following lottery:
|
Probability
|
Payoff
|
|
0.20
|
$10,000
|
|
0.50
|
$50.000
|
|
0.30
|
$100,000
|
If the risk aversion coefficient is λ = 1/150,000:
• What is the certainty equivalent of the lottery?
• What is the risk premium?
Provide complete and step by step solution for the question and show calculations and use formulas.