What is the risk premium at the maximum IP

Assignment Help Finance Basics
Reference no: EM132184028

Question - A person has a net asset of $1 million, including a $300,000 net equity of a house (market value of the house mortgage). Specifically, the house has a market value of $500,000 including $300,000 for the structure and $200,000 for the land, and a mortgage of $200,000. The person plans to buy $300,000 fire insurance for full coverage of the house. For simplicity, assume that each year the house has a 1% probability of being totally destroyed by fire and a 99% probability of no damage occurring to the house. The person's utility for money is approximately proportional to the quartic root of money with U($100,000,000) = 1,000 and U($0) = 0.

a. Draw the decision tree for the person's decision of buying or not buying the insurance.

b. Determine the maximum insurance premium IP the person would be willing to pay.

c. What is the risk premium at the maximum IP?

Reference no: EM132184028

How would this technique affect the profits of future period

Explain how WorldCom showed higher profits in the current period by inaccurately classifying expenses as assets. How would this technique affect the profits of future period

Individual or component costs of capital

Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the fir

What is the investments probability index

Your firm is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $300,000 in year 2 through 4, and $100,00

What happens to financial intermediaries as securitization

What is the relationship between securitization and the role of financial intermediaries in the economy? What happens to financial intermediaries as securitization progresse

What is the bonds nominal yield to call

Walker Industries has a bond outstanding with 12 years to maturity, a 9% coupon paid semiannually, and a $1,000 par value. The bond has a 7% nominal yield to maturity, but i

Calculate bear earnings per share for next year

Calculate Bear's Earnings Per Share for next year assuming the firm raises $60 Million of new debt at an interest rate of 9 percent Answer a. $2.54 b. $22.54 c. $1.69 d. $16

Calculate the minimum monthly payment

After a car accident Cheryl's insurance carrier offers $350,000 today or twenty years of monthly payments. If her required rate of return is 8% per year, calculate the minim

Capital organizational structure of a company

If indeed the software industry is driven by ‘brains and ideas' and not by ‘plant and equipment' (like automotives), what would the implications of that be on the ‘capital'

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd