Question: A decision maker incurs the following risk: Probability Severity 0,4 0 0,25 200 0,2 1400 0,15 5000 What is the maximum premium the decision-maker is

A decision maker incurs the following risk:

Probability

Severity

0,4

0

0,25

200

0,2

1400

0,15

5000

What is the maximum premium the decision-maker is ready to pay, if he:

  1. is risk neutral
  2. exhibits the constant risk aversion with the parameter a=0,001.

Discuss and comment your results.

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