Estimates of the risk premium

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Suppose that the payoffs from an investment in a recession are a 10% chance of $1,000 or a 90% chance of -$10,000. Compute the risk premium using the exact expression and the approximation for with values 3! equal to 0, 0.5, 1, 2, 5 and 10. What happens to the difference between these two estimates of the risk premium as 3; increases? Comment on your results.

Reference no: EM133072057

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