# How to find certainty equivalent wealth?

Date created: Wed, Jun 2, 2021 2:12 PM
Date created: Wed, Jun 2, 2021 7:23 PM
Certainty Equivalent: The amount of payoff that an agent would have to receive to be indifferent between that payoff and a given gamble is called that gamble's 'certainty equivalent'. To Calculate the Certainty Equivalent: Let z1 be the payoff for A and z2 be the payoff for B Lets assume the utility function to be concave.
Date created: Thu, Jun 3, 2021 3:56 PM
﻿ Certainty Equivalent Cash Flow = Expected Cash Flow ( 1 + Risk Premium ) \text{Certainty Equivalent Cash Flow} = \frac{\text{Expected Cash Flow}}{\left(1\ +\ \text{Risk Premium} \right ...
Date created: Sat, Jun 5, 2021 2:06 AM
Certainty Equivalent, or CE = U-1 (EU) = U-1 (0.5) Now, from the above chart, we can easily see that, for the Utility function's input value around 60,000$, we get the utility function value = 0.5. So, we get, U-1 . So, your Certainty Equivalent for this uncertain investment should be 60,000$, not 5,000$. Answered By: Juvenal Goldner Date created: Sat, Jun 5, 2021 11:20 PM Consider an individual with zero initial wealth and a utility function U(W) = 1 – exp[-0.0001W]. Find the certainty equivalent for each of the alternatives below. Answered By: Krystel Koelpin Date created: Mon, Jun 7, 2021 6:53 PM The concept of certainty equivalent wealth is central to the understanding of rational behavior under uncertainty and to the regulation of behavior in such circumstances. The Demonstration presents a simple model in which the user may vary three sliders: the probability that the individual will be in position 1, the wealth associated with position 1, and the wealth associated with position 2. Answered By: Alfonso Ward Date created: Tue, Jun 8, 2021 11:09 PM The certainty equivalent is the amount of cold hard cash you'd be indifferent to taking in lieu of the uncertain outcome. In the good outcome with 1 3 probability, you'd end up with a wealth of 10 + 12, and in the the bad state with probability 2 3 where the lottery does not give you anything, you still end up with wealth of 10. Answered By: Tomas Bogan Date created: Thu, Jun 10, 2021 12:43 PM Certainty Equivalent Cash Flow =$2.3 million ÷ (1 + 8%) = $2.13 million You can send the following memo back to the finance director: IT Tower project was expected to generate$2.13 million certainty equivalent cash flow per year for 15 years.
Date created: Fri, Jun 11, 2021 7:43 AM
Based on Equation (3) and (10), Certainty equivalent = X – Risk equivalent = X – X [2N (σT/4) – 1] = 2X [1 – N (σT/4) ]. Equation (11) is the model of certainty equivalent. Accordingly, the model of certainty equivalent coefficient is: = 2[1 – N (σT/4)].
Date created: Fri, Jun 11, 2021 10:54 PM
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