A Risk Premium, RP, Can Be Computed with the Following

question 19

Multiple Choice

A risk premium, RP, can be computed with the following formula, where I₁ and I₂ are the two payoffs to a lottery, with probabilities p and (1-p) , respectively :

• A) p(I₁) + (1-p)I₂ = RP
• B) pU(I₁) + (1-p)U(I₂) = RP
• C) pU(I₁) + (1-p)U(I₂) = U(EV-RP)
• D) U(EV) = RP

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