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Risk And Information - Assignment Example

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As the chairman of the Insurance Club in the University, I was tasked with the obligation of selecting a viable project among the two available projects. I and other club members were to make sure that the selected project will be the most suited to increase the revenues of the…
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Risk And Information
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Risk And Information

Download file to see previous pages... After critical analysis using the expected value criterion method, it was evident that project Y (8000) was best suited to increase the revenues as compared to project X (6000). The expected return of project Y is greater than that of project X. It was therefore decided that the club should invest the cash on starting a bookshop business because it tends to benefit the club more in terms of revenue increase. I am a risk lover, that’s why I’ll opt for option Y which has high risk (high probabilities) but high returns.
Risk preference-the risk preference of an individual can cause the change in the probabilities. Risk averse individuals will always prefer low probabilities (low risk but low returns) when making decisions while risk loving individuals will go for high probabilities (high risk but high returns). Therefore, if an individual change his/her risk preferences the probabilities will change.
Risk premium- this is the difference between the expected value of returns and the sure thing such that the decision maker is indifferent between the returns and the sure thing. The higher the variance of the returns the larger the risk premium hence the higher the ...Download file to see next pagesRead More
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