Imagine you have $24,000 and you are willing to invest. You have two choices:
a) A safe investment that promises to pay 5% profit after 1 year.
b) A risky investment that has a 25% chance you might loose half of your money.
1) How much do you expect to get paid for a year in the second investment to be indifferent between two investment choices? (the two investments have the same Expected Profit)
2)What is the Risk Premium in the second choices?