Question

Certainty Equivalent (CE) is the amount of cash someone would require with certainty at a point in time to make the individual indifferent between that certain amount and an amount expected to be received with risk at the same point in time. In view of this statement bring out the different risk attitudes of individuals.

Answer 1

ANS: Certainity equivalent is a gauranteed return that someone would accept rather than takig risk at future point of time.Companies offer certainity equivalent return on certain investments & use their demands to determine the level of risk that an investor will accept for the give return.

Risk is a term that is related to uncertainity about an event & its outcome. Risk model are subjective ,so the assumptions about the risk deal with a person's individual attitude towards risk & their understanding of a specific situation.

The different risk attitudes of individuals are-

1. Risk aversion - It is a type of attitude of an human who when exposed to uncertainity attempts to lower that uncertainity. Risk Tolerence seems to be opposite of risk aversion.
2. Risk Seeking - It is an acceptance of higher volatility in trading for higher rate of return. They are generally nore interested in capital gain from speculative assets.
3. Risk Neutral - These are the persons who are insensitive to the risk. Investors ignores the risk completely while making the investment decisions.