Determine certainty equivalent, Risk Management

Ben owns a home in "tornado alley" in Oklahoma that is worth $100,000.  In any given year, he knows that there is a 1% chance his home will be hit by a tornado.  If it is, his home will be completely destroyed. 

      Ben's certainty equivalent of his uncertain prospect is $98,000.

a.   Graph Ben's utility of wealth function and the expected value of his uncertain prospect.  Label his expected utility and his certainty equivalent. 

b.   What is the maximum Ben will be willing to pay to insure his house?  Explain.

c.   Ben's town in Oklahoma is home to 999 other families, each of whom owns a $100,000 home that has a 1% chance of being destroyed and each of whom has preferences identical to Ben's.  The local insurance company is considering offering tornado insurance to the residents of the town.  It has determined that its administrative costs in providing such insurance would be $1,200 per policy.      

How many policies will be sold?  At what price?  Explain.

Posted Date: 2/25/2013 2:14:37 AM | Location : United States







Related Discussions:- Determine certainty equivalent, Assignment Help, Ask Question on Determine certainty equivalent, Get Answer, Expert's Help, Determine certainty equivalent Discussions

Write discussion on Determine certainty equivalent
Your posts are moderated
Related Questions

Q. Show Quick and regular returns of the investments? Quick and regular returns of the investments: every investor wants a quick and regular returns on his investment sufficienc

There are 5 primary steps in assessing risk in the workplace wrt to H&S, identify 3 and discuss the what actions should be taken to manage or negate the risks posed - The sect

Question 1: Define the following terms: (a) Whole life assurance (b) Immediate annuity (c) Market Liquidity Risk (d) With-pro

Using the above information, and any other information (state assumptions), create the start of a risk register for the project, using the Risk Register Sample below as a guide. Id

The Investment Committee of UoM has suggested that it may be time to take some "insurance" on the U.S. equity portfolio, given "rich valuations" in the U.S. Equity markets. As t

Question 1: Employers should conduct proper health risk assessment in order to identify and control health risks before they lead to losses. Describe the four stages involved i

Q. Importance or advantage of the working capital? Working capital is the lifeblood and never centres of the business. Just like a blood ,that necessary , no business can run w

International Risk: International risk can include exchange rate risk and country risk. (i) Exchange Rate Risk: All investors who invest internationally in today's increasing

Problem: (a) What are the two primary stages of Risk Management of a project? (b) What are the formalities to consider in a Project Termination Phase? (c) Briefly explain