Give an example of a risk premium?

Q: At what point in one’s life is it safest to try a risky investment? Closer to or further from…

A: From the investment point of view, the life of an individual can be divided into four phases -…

Q: Why do economists say that people tend to be risk-averse?

A: Different individuals have different preferences towards risk or uncertainty. Most individuals are…

Q: Consider the model of competitive insurance discussed in lectures (Topic 6.7). Peter is a risk…

A: In a competitive insurance market the fair premium price is equal to the expected value of the loss…

Q: Why does the risk-adjusted discount rate reduce the investment's appeal?

A: Risk adjusted discount rate refers to the summation of risk free rat and the risk premium. Risk…

Q: Explain with an example of the Inclusion of Risk in Investment Evaluation?

A: Risk can be included in the evaluation of an investment by measuring the degree of risk using the…

Q: Who were the Bernoulli's and what was their contribution the expected utility theory (or decision…

A: Jacob I Bernoulli, Johann I Bernoulli, and Daniel Bernoulli are the three most famous Bernoulli…

Q: Define the term risk aversion?

A: The term Risk Aversion explains how people will react to a situation with an uncertain outcomes. It…

Q: At what point in one’s life is it safest to try a risky investment?  Closer to or further from…

A: Its safest to try risky investment when you are further from retirement.

Q: If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000…

A: Risk aversion is the human behaviour against taking risk. Every individual wish to earn maximum with…

Q: Consider two individuals, Bjorn and Angela. Bjorn has preferences over wealth represented by a…

A: We have two individual with two different utility functions .

Q: Review the concept of value at risk (VaR) in chapter 5. Evaluate the following two cases and decide…

A: Value at Risk (VaR) is a metric that measures the magnitude of potential financial losses inside a…

Q: Explain what is the risk premium?

A: A risk premium is the return in excess of the risk-free rate of return an investment is predicted to…

Q: List three different ways that a risk-averse person can reduce financial risk.

A: Financial Risk would result in the risk which would be borne by the investor which results in the…

Q: Consider the model of competitive insurance discussed in lectures (Topic 6.7). Peter is a risk…

A: In a competitive insurance market the fair premium price is equal to the expected value of the loss…

Q: Can the risk of a housing bubble be averted?

A: The housing bubble caused the economic recession in the 2007 which turned out to be the biggest…

Q: Ever since the Covid-19 pandemic hit the economy the price of gold has been sky high .Today price…

A: An investment is an essential part of creating wealth as it adds more output to the economy and…

Q: What’s the difference between risk pooling and risk diversification?

A: Risk means probable ambiguity about the divergence from predicted profits or anticipated results. In…

Q: Should a person who is risk-averse hold a portfolio with no stock and only bonds? Explain.

A: Equity investment is volatile and a person may lose all his money in a particular stock if the…

Q: If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000…

A: The risk averters are those individuals look forward to minimize risks. They can avoid the chances…

Q: Explain the relationship between U" >0 and risk aversion.

A: Connection coefficients are markers of the strength of the straight connection between two unique…

Q: An insurance company sells policies for $1,000 each. Based on historical data, an average of 1 in…

A: Expected pay out (EP) can be calculated by using the following formula.

Q: hat is covariance, and why is it important in portfolio theory

A: Covariance is used in finance to measure the two variable's degree of movement together relative to…

Q: Joey has utility function  1+√x where x is the amount of money he has. He is... A) Cannot tell from…

A: Given utility function - U = 1+√x

Q: What is the Risk-Adjusted Discount Rate Approach?

A: The rate of return is an important factor that determines whether the investment or project purpose…

Q: Consider the model of competitive insurance discussed in lectures (Topic 6.7). Peter is a risk…

A: Utility function can be defined as the measure for a group of goods and services preferred by…

Q: Define risk pooling.

A: Risk pooling refers to health insurance, representing a group of individuals contributing to a…

Q: Why are investors’ utility curves important in portfolio theory?

A: A portfolio is a a collection of financial assets and investment tools that are held by an…

Q: Investors have different preferences with regards to the risk: they can be risk averse, risk neutral…

A: The risk averse people are those person who always prefers lower risk among the different levels of…

Q: Suppose Xavier has tickets to the Super Bowl, but is terribly ill with a noncontagious infection.…

A: According to the traditional model of risk behavior, the normal person likes to take risks. The…

Q: Economics Fenner Smith from Workouts 13.2 is an investor who has preferences for risk o and return u…

A: We are going to find the budget line equation and fraction of wealth invested in market portfolio to…

Q: Define the term risk premium?

A: Market Risk Premium: The amount that remains after deducting the risk-free rate of return from the…

Q: Describe the risk-adjusted discount-rate approach?

A: A person invests in a risky investment with the aim of earning higher returns as riskier the…

Q: Give an example of a risk-free interest rate?

A: The rate of return on an investment that is theoretically devoid of any risk is known as the…

Q: Explain how risk aversion makes a market for insurance possible

A: Risk-averse individuals are those investors who fear risks or in other words who behave in a…

Q: For any given distribution of outcomes and probabilities, describe how preferences over risk affect…

A: The individual's preferences are "well-behaved" enough to be spoken to over probability…

Q: Suppose that Jim has a von Neumann-Morgenstern utility function: U(c) = c². %3D Based on his utility…

A: Given, U(c) = C2 Risk-averse people are those who prefer not to take any risk or want to reduce the…

Q: Define the term Risk-Free-Interest Rate?

A: A risk-free interest rate is a rate of return on investment with the least risk or no risk. Since…

Q: Under what conditions will behavioral biases impact stock returns? under what conditions will…

A: Behavioural bias will mirror that singular conduct will have higher impact over his trading choices…

Risk and Uncertainty

Uncertainty refers to a situation when there is one possible outcome of a decision but where the probability of occurrence of each particular outcome is not known or cannot be estimated.