You've chosen to invest your whole fortune of $200,000 in a cabin near Calgary, Ontario. You believe that there is a 2% probability that your cottage will be flooded in the following year as a result of its frequent exposure to water, in which event you anticipate to lose roughly 575.000.

a) What is your expected level of wealth for the next year?
b) What is the utility of your expected wealth next year?
c) Assuming that you can buy an insurance policy specifically against water damage (which would completely  eliminate your downside risk), how much would you be willing to pay for this insurance policy?

Answer rating: 100% (QA)

To calculate the expected level of wealth for the next year we need to consider the probabilities an... View the full answer