The risk premium and the effects of risk on utility

Mario Menegatti

No 2007-EP10, Economics Department Working Papers from Department of Economics, Parma University (Italy)

Abstract: This work shows that the risk premium can be a mistaken measure of the reduction in utility caused by uncertainty since, when different level of wealth are considered, the relative size of the former is related to that of the latter only in some cases. The analysis indicates that this is because the size of the risk premium depends both on the size of the disutility of risk and on the size of the marginal utility of money. Some simple economic problems where this conclusion is relevant are also examined.

Keywords: Risk premium; Uncertainty; Utility (search for similar items in EconPapers)
JEL-codes: D11 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2007

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