Why a risk-averse person might buy unfair insurance

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Reference no: EM131344909

Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash is the frequency for 2002-2009. If the probability were as high as the frequency in 2001, 0.00000077, what would be a fair price? Use a graph to illustrate why a risk-averse person might buy unfair insurance. Show on the graph the risk premium that the person would be willing to pay.

Reference no: EM131344909

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