Essay
Lin has wealth of $100,000 and faces a 5% probability that she will get sick and lose $40,000.
a. What is Lin's expected wealth?
b. What is Lin's expected loss?
c. What price would Lin pay for an actuarially fair insurance policy that would reimburse her the full value of her loss?
d. Suppose that Lin's certainty equivalent is $97,000. What is Lin's risk premium?
Correct Answer:
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a. 0.95(100,000) + 0.05(60,000) = $98,00...View Answer
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Correct Answer:
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