1. (15 points) Quinn faces a series of simple fair coin flips, where heads results in...

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1. (15 points) Quinn faces a series of simple fair coin flips, where heads results in a gain of $1 and tails results in a loss of $1. Suppose Quinn's utility function is CARA with a = 0.1. (a) (5 points) Calculate Quinn's risk premium for a single coin flip. (b) (5 points) Calculate Quinn's risk premium for three independent coin flips. (c) (5 points) Calculate Quinn's risk premium if the coin is flipped three times and the total payoff is divided by three. 1. (15 points) Quinn faces a series of simple fair coin flips, where heads results in a gain of $1 and tails results in a loss of $1. Suppose Quinn's utility function is CARA with a = 0.1. (a) (5 points) Calculate Quinn's risk premium for a single coin flip. (b) (5 points) Calculate Quinn's risk premium for three independent coin flips. (c) (5 points) Calculate Quinn's risk premium if the coin is flipped three times and the total payoff is divided by three.

Answer rating: 100% (QA)

To calculate Quinns risk premium for each scenario we need to use the Constant Absolute Risk Aversion CARA utility function which is given by Ux 1 eax ... View the full answer