Assume Brandon's Benefit Function for Water Is S(W)= √W and He

question 2

Multiple Choice

Assume Brandon's benefit function for water is S(W) = √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Brandon's risk premium is:

• A) 250 units of water.
• B) 325 units of water.
• C) 17.5 units of water.
• D) 18.75 units of water.

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Definitions:

Market Risk Premium

The additional yield investors anticipate from maintaining a portfolio with inherent market risk rather than opting for assets free of risk.

Required Rate of Return

The minimum annual percentage return investors expect or demand from an investment, considering the risk involved.

Risk Averse

A description of an investor or investment philosophy that prioritizes the minimization of risk over potential returns.

Risk-free Rate

The theoretical rate of return on an investment with no risk of financial loss, typically represented by government bonds.