Compare the risk premium from Exercise 6-1E with the risk premium computed assuming a negative exponential distribution function with a risk aversion of 0.003.

Exercise 6-1E

Assume an investment opportunity that pays $100,000 with probability 0.75 and $125,000 with probability 0.25. Given a risk aversion coefficient of 0.35 and a power utility function, what is the certainty equivalent and risk premium of the gamble? How do these values change the value of the gamble if the probability of $100,000 declines to 0.40?