Length : around 10 minutes
Answer the questions. Several answers possible.
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Question 1 of 7
1. Question
What is risk aversion ?
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Risk aversion characterizes the degree to which an individual prefers the absence of risk to a risky situation. Risk is often associated with high gain expectation, individuals are therefore more or less reluctant to take risks, depending on the associated gain. They are more or less averse to risk.
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Question 2 of 7
2. Question
An individual who is averse to risk will have the following utility function :
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A convex utility function represents the desire for risk, the individual is said to be “riskophile”, he/she likes risk.
A concave utility function represents risk aversion, the individual is said to be “riskophobic”, he/she does not like risk.
A linear utility function represents an individual who has a neutral attitude towards risk, he/she is impartial to risk. -
Question 3 of 7
3. Question
What is the certainty equivalent of a lottery ?
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The certainty equivalent is the certain amount which the individual is willing to receive rather than participate in that lottery. If the individual is averse to risk the certainty equivalent is lower than the expected lottery gains.
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Question 4 of 7
4. Question
What is the risk premium equal to ?
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The risk premium is the “price” of risk, it is the amount which the individual is willing to pay in order to receive expected lottery gains rather than participate in the lottery. It is therefore the difference between the expectation of the lottery and the certainty equivalent of the latter.
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Question 5 of 7
5. Question
A farmer has 1ha of land. He can either grow crop A which yields 4000€ per hectare once every 3 years and 10000€ per hectare twice every 3 years, or crop B which yields 7000€ per hectare every year.
What is the gross margin of crop A ?Correct
Incorrect
The gross margin of crop A is 8000€ on average (4000/3+10000*2/3).
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Question 6 of 7
6. Question
A farmer has 1ha of land. He can either grow crop A which yields 4000€ per hectare once every 3 years and 10000€ per hectare twice every 3 years , or crop B which yields 7000€ per hectare every year.
If he is impartial to risk, what will he choose to grow ?Correct
Incorrect
The gross margin of crop A is 8000€ on average (4000/3+10000*2/3). An individual who is impartial to risk will therefore opt for this crop because it is more profitable than crop B.
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Question 7 of 7
7. Question
A farmer has 1ha of land. He can either grow crop A which yields 4000€ per hectare once every 3 years and 10000€ per hectare twice every 3 years, or crop B which yields 7000€ per hectare every year.
The farmer chooses to grow crop B only, what can we say about him ?Correct
Incorrect
The gross margin of crop A is 8000€ on average (4000/3+10000*2/3). An individual who is impartial to risk will therefore opt for this crop because it is more profitable than crop B. However, if the farmer chooses crop B, this means that he is averse to risk (we presume that A and B similar), he prefers a crop that is consistent in terms of yields over a riskier crop, even if it is less profitable on average.
