Compute the certainty equivalent of his bet.

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Richard Risky bets some money on the result of a tennis game. If he wins his bet, he will get 200€ and if he looses his bet, he will go home with only 20€. The probability of winning his bet is ? and the probability of losing his bet is ?. His utility function is given by u(x) = x4/3 .

a) Is Richard Risky risk-averse?

b) Compute the certainty equivalent of his bet!

c) Calculate the Arrow-Pratt measure of absolute and relative risk aversion!

d) Compute Richard Risky's risk premium! Why is it difficult to model agents with

Richard's risk attitude in an economic context?

Reference no: EM1345999

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