Question: Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as

Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to illustrate why a risk-averse person might buy unfair insurance. Show on the graph the risk premium that the person would be willing to pay?

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Fair insurance is a bet between an insurer and a policyholder in which the value of the bet to the p... View full answer

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