BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -The risk premium of a gamble is the extra amount required to make an agent indifferent between the gamble and the expected value of the gamble. Conversely, it can also be thought of as the amount of money a risk averse agent will pay to avoid any risk.

Detailed explanation-2: -The risk premium is the difference between the expected value and the certainty equivalent. For risk-averse individuals, risk premium is positive, for risk-neutral persons it is zero, and for risk-loving individuals their risk premium is negative.

Detailed explanation-3: -A quantitative and practical method is the following: we attributed a number from 1 (lowest risk aversion) to 5 (highest risk aversion) to an investor. We then assign this number the letter A, which is called the “risk aversion coefficient".

Detailed explanation-4: -A risk premium is the investment return an asset is expected to yield in excess of the risk-free rate of return. An asset’s risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset.

Detailed explanation-5: -Exhibiting risk aversion means to shy away from risk, and in terms of investing means avoiding risky securities. Risk averse individuals should seek out investments and strategies that fit this low risk tolerance. As such, one advantage is that the risk of losses are minimized.