What it takes in expected return to make her indifferent

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Reference no: EM13922129

Decision Making Under Uncertainty

a. Yes, Amiko is risk-averse. She is willing to take on more risk only if it is associated with a sufficiently higher expected return.

b. Amiko's certainty equivalent is $15,000. She would be willing to accept a certain return of $15,000 (the vertical intercept of her indifference curve) in lieu of her current risky investment that has an expected return of $25,000 and a standard deviation of $10,000.

c. The risk premium on Amiko's current investment is $10,000. This is the difference in the expected return of her risky investment and the risk-free investment (certainty equivalent). The $10,000 risk premium is what it takes in expected return to make her indifferent between the risk and risk-free investments.

Reference no: EM13922129

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