Arbitrage pricing theory

Solution

Past exam of the mathematics course of the University of Cambridge / 2001 / iii / Paper 23 / 2 / c / Solution

Past exam of the mathematics course of the University of Cambridge / 2001 / iii / Paper 23 / 3 / b / Solution

Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 32 / 1 / c / i / Solution

Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 32 / 5 / Solution

{title2=$\mathbb E W-\operatorname{CE}(W)$}
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In <expected utility> theory, the risk premium is the difference between expected wealth and its certainty equivalent: $U(\operatorname{CE}(W))=\mathbb E U(W)$. For increasing concave <utility functions> it is nonnegative by the <Jensen inequality>. In financial asset pricing, risk premium also refers to expected return above a specified risk-free benchmark; the benchmark and whether the premium is monetary or proportional must therefore be stated.

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 Incoming links: Risk premium