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Order to avoid the risky scheme

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ABC Corp. has a bonus plan in place for its CEO, linking her pay to annual earnings. ABC will pay her $180,000 if earnings are high, $90,000 if they are normal, and $0 if they are low. Each event is estimated to have equal probability. Assume the CEO is indifferent between this bonus plan and receiving $75,000 with certainty. Which of the following is true?

  • The CEO's expected bonus is $90,000.
  • The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme.
  • $85,000 is the CEO's certainty equivalent for the current bonus plan.
  • The CEO has no clue about risk management.

Reference no: EM131067836

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