Question 8

Suppose that Mashudu is an expected utility maximiser, with the utility function U(x) = x, for x > 0. She engages in a risky venture that leaves her with either R8 100 or R2 500, with equal probability.

8.1 Determine the certainty equivalent of the risky venture. [4]

8.2 Determine the risk premium of the risky venture. [3}