Question

a) Derive in detail the type of risk premium required by the risk averse investor                         ...

a) Derive in detail the type of risk premium required by the risk averse investor                         


b) Hence, determine if the above result maximizes the risk averse investor's expected utility. 


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Answer #1

1) Risk averse investors are those type of investors who invest in those investments where risk is low and expected return is equal these types of investors do not prefer to risk there investments for earning higher returns

RISK PREMIUM it is return in excess of risk free rate or it is a type of compensation given to investors who invest in risky projects in order to earn higher return so risk averse investor risk premium will be LOW as they do not prefer to take risk.

2) utility is calculated as

where A stands for utility score given for investor more the utility score more is willingness to take risk so for risk averse investor A=0 so utility will be equal to expected return and that will be maximum

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