What is certainty equivalent, and how does it relate to risk premiums?
Let us lay two choices in here. The first one has a guaranteed return, but you should accept it now. The second choice offers a higher but uncertain return because we can never predict the future. What would you choose between the two? Risk-averse people would most likely choose the first option, and we call it a certainty equivalent. It is a guaranteed amount of … Continue reading What is certainty equivalent, and how does it relate to risk premiums?
