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
Question: (a) What are the various options to mitigate risks in an Information Security Management System (ISMS)? For each option specify an instance where it can be used.

Q. What is Expected Return on a Portfolio? The Expected Return on a Portfolio is simply' the weighted average of the expected returns of the individual securities in the given

Question 1: (a) What are Upper Limb Disorders? (b) Describe seven main factors that are likely to increase the risk of upper limb disorders at work and suggest ways for redu

what is ripples?

Risk Management The major risks involved in the implementation of syringe management plan include the following. Ideas to manage them are as well mentioned along with the risks

Risk management decisions and practices should be transparent Risk management should include the identification and systematic documentation of all elements of the risk managem

The Case: Recently after graduating from Local Business College (LBC), you have started your own investment consultancy firm – Prudent Consultants (PC’s) to earn your livelihood. M

Question: (a) Discuss the potential health risk which composting can pose to workers or to those located near a facility. (b) A number of concerns have been identified in

a) Discuss the post loss objectives that would help the firm recover

Determination  of risk  assessment  policy  should  be  included  as  a specific  component  of  risk management Risk assessment policy  sets the guidelines for value judgments