The risk premium of a gamble is defined as:
A) The difference between the expected value of the gamble and the Certainty Equivalent; the amount you are willing to forego to avoid the gamble.
B) The amount of money that makes an individual indifferent between receiving that amount for certain and taking on the gamble.
C) The difference between the expected value of the gamble and the expected utility of the game.
D) The initial endowment you started with prior to being faced with the gamble.

Question

Quizplus · Accepted Answer

The risk premium of a gamble is indeed the difference between the expected value of the gamble and the Certainty Equivalent, which represents the amount an individual is willing to forego to avoid the risk associated with the gamble. This concept is crucial in understanding how individuals value risk and make decisions under uncertainty.

The Risk Premium of a Gamble Is Defined As