How good is the p-a approximation of the risk premium for, Ask an Expert

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How good is the P-A approximation of the risk premium for “large” risks.

a) The risky wealth is: ($120K,$100K,$40K) with probabilitie (0.3,0.6,0.1). Compute the expected utility and the exact RP of a log-utility investor.

b) Compute the mean, variance and standard deviation of wealth for this distribution. Compute the approximate P-A $RP of the log utility investor.

c) Is the Pratt-Arrow RP a good approximation? How large is the coefficient of variation of wealth? Is the risk a large fraction of wealth here?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92801310

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