Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a risk-free asset paying an annual interest rate of 6%. There is a probability of .001 that your house will burn to the ground and its value will be reduced to zero. With a log utility of end-of-year wealth, how much would you be willing to pay for insurance (at the beginning of the year)? (Assume that if the house does not burn down, its end-of-year value still will be $200,000.)

Suppose that your wealth is $250,000. You buy a $200,000 house and invest the remainder in a risk-free asset paying an annual interest rate of 6%. There is a probability of .001 that your house will burn to the ground and its value will be reduced to zero. With a log utility of end-of-year wealth, how much would you be willing to pay for insurance (at the beginning of the year)? (Assume that if the house does not burn down, its end-of-year value still will be $200,000.)

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter16: Real Estate And High-risk Investments

Section: Chapter Questions

Problem 2FPC

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