Return to site

Risk aversion Essay Example | Topics and Well Written Essays - 1500 words

Risk aversion - Essay Exampleptimally increasing expected net gains does not take into consideration risk attitudes or an individual’s attitude to carrying the risk of uncertainty, it is risk neutral. On the other hand, the individual’s attitude to risk bearing is taken into account if expected utility rather than expected gain is to be maximised. Risk premium, equity premium or market premium refers to the additional allowance for risk which results in high rates of interest in the private sector. “The market risk premium is the expected rate of return in the aggregate stock market in excess of the risk-free interest rate� (Fernandez 2002, p.201).Thesis Statement: The purpose of this paper is to compare the State Preference and Machina triangle diagrams, explain an Edgeworth Box diagram, and discuss the factors that determine the efficient allocation of risk.An individual is risk averse if for any probability distribution the expected value of the distribution is preferred to the distribution itself.