An individual is said to risk averse if his/her certainty equivalent for a risky prospect is:
A) always negative.
B) equal to its expected value.
C) equal to the average probability of the outcomes.
D) always zero.
E) less than its expected value.

Question

Quizplus · Accepted Answer

A risk-averse individual is someone who would require a higher expected return to take on additional risk. Hence, their certainty equivalent (the guaranteed amount that would make them indifferent between taking the risky prospect and receiving the certain payment) would be less than the expected value of the risky prospect. Therefore, choice E is correct.

An Individual Is Said to Risk Averse If His/her Certainty