Compute value of risk premium and insurance premium

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Jack owns an initial wealth (W0) of $30. Inadvertently, he agreed to enter into the following game :

- With 1/4 probability his wealth goes up to $50

- With 1/2 probability his wealth stays the same

- With 1/4 probability his wealth goes down to $10

If the utility function for Tom is given by U(W) = 100W - W² (W <= 50), answer the following :

a) Compute the value of the risk premium and insurance premium.

b) Compare the two values and explain.

Reference no: EM133305767

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