Determine certainty equivalent, Risk Management

Assignment Help:

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.


Related Discussions:- Determine certainty equivalent

Defined contributionm, managing risks in investing defined contribution fun...

managing risks in investing defined contribution funds

Risk management decisions should be transparent, Risk management decisions ...

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

Risk premium, Risk Premium A risk premium is the extra or excess which ...

Risk Premium A risk premium is the extra or excess which is return on a risky asset relative to the return on risk-free assets. Therefore, it defines the additional return that

Finance question, Suppose you are running an international business and are...

Suppose you are running an international business and are concerned about converting foreign currencies (the Euro in particular) back into U.S. dollars in September. A) What po

Basic risky decision problem, Here is a basic risky decision problem: ...

Here is a basic risky decision problem: Using the template below, sketch the results of a sensitivity analysis on P(Deal Succeeds) for a risk-neutral decision maker. How hi

Historical simulation approach, 1) What difference does it make to the Var ...

1) What difference does it make to the Var calculated in Example if the exponentially weighted moving average model is used to assign weights to scenarios as described in Section 1

What is business risk - non-systematic risk, What is Business Risk - Non-Sy...

What is Business Risk - Non-Systematic Risk Risk of doing business in a particular industry or environment is known as business risk. For instance, as one of the largest steel

Decisions in sales promotion, the importance of determining the policy on y...

the importance of determining the policy on your image?

binomial option pricing model , Question 1 Zero coupon yields (all yie...

Question 1 Zero coupon yields (all yields are continuously compounded) are 3.00% for three months, 3.50% for six months, 3.60% for nine months and 3.80% for twelve months. Nort

Write Your Message!

Captcha
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