Gabe has wealth of $100,000 and faces a 5% probability that he will get sick and lose $40,000.
a. What is Gabe's expected wealth?
b. What is Gabe's expected loss?
c. What price would Gabe pay for an actuarially fair insurance policy that would reimburse him the full value of his loss?
d. Suppose that Gabe's certainty equivalent is $97,000. What is Gabe's risk premium?

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The Answer of Gabe has wealth of $100,000 and faces a 5% probability that he will get sick and lose $40,000.
a. What is Gabe's expected wealth?
b. What is Gabe's expected loss?
c. What price would Gabe pay for an actuarially fair insurance policy that would reimburse him the full value of his loss?
d. Suppose that Gabe's certainty equivalent is $97,000. What is Gabe's risk premium?

Gabe Has Wealth of $100,000 and Faces a 5% Probability