Frequently Asked Questions In Quantitative Finance

Chapter 2: FAQs 93

we find that the certainty equivalent is $2.34. So we

would pay this amount or less to play the game. Above

is a plot of the certainty equivalent for this example as a

function of the risk-aversion parameterη. Observe how

this decreases the greater the risk aversion.

References and Further Reading

Ingersoll, JE Jr 1987Theory of Financial Decision Making.Row-

man & Littlefield