Question: Jenny is an investor in the stock market. She cares about both the expected value and the standard deviation of her investment. Currently she is invested in a security that has an expected value of $15,000 and a standard deviation of $5,000. This places her on an indifference curve with the following formula: Expected Value = $10,000 + Standard Deviation.

(a) Is Jenny risk averse? Explain.

(b) What is Jenny’s “certainty equivalent” for her current investment? What does this mean?

(c) What is the risk premium on her current investment?