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Calculate the expected income and variance

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Reference no: EM133125606

1. This problem uses a utility function of the form U = 1 - exp(-0.0001 X Income) where exp(z) means "ez". The problem analyzes a gamble in which Income = 1,000 with probability 0.3 and Income = 2,000 with probability of 0.7.

  1. Calculate the expected income and variance.
  2. Calculate the expected utility.
  3. Calculate the certainty equivalent income, Ic, which is the level of income generates the expected utility.
  4. Calculate the risk premium, which is defined as the difference between expected income and Ic.
  5. Calculate the approximate risk premium by using the formulae, risk premium = ½ * r * variance.  Is it different from what we get in the last step?

Reference no: EM133125606

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