A Risk Premium

question 15

Multiple Choice

A risk premium

• A)is required to get a risk-neutral person to make a fair bet.
• B)is the maximum amount needed to compensate a decision-maker to willingly take a risk.
• C)is the maximum amount a decision-maker would pay to avoid taking a risk.
• D)is the minimum amount a decision-maker would pay to avoid taking a risk.

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Definitions:

Residual

The difference between the observed and the predicted value in a regression model.

Actual Value

The true or factual value of a variable or quantity, without estimation or error.

Estimated Value

An approximation of the worth of something, often used in the context of potential outcomes in decision making or investment.

Inverse Relationship

A relationship between two variables in which one variable increases as the other decreases.