Yoshiaki Yokoi’19
Professor Conger
ECO3030.25
12 February, 2017
1
The person is going to buy car insurance. Risk–averse and will pay to avoid risk.
In addition, Probability of car accident is higher than probability of no–accident.
This probability relates to the value of risk. Accident is the worst possible cause for this
insurance.
2
It will double the expected return as well as the standard deviation. For instance, if the asset
returns the $3,300, the lender will have to be repaid $1,250, but this leaves $2,050. If the
asset returns $2,700 the lender still needs to be repaid, leaving $1,450. Since each number is
equally likely, we can calculate the expected return and standard deviation of leverage.
Expected value = ½($2,050) + ½ ($1,450) = $1,750. The $1,750 expected value on a $1,250
