# certainty equivalent

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## Certainty equivalent

An amount that would be accepted today (risk free) in lieu of a chance to receive a possibly higher, but uncertain, amount.

## Certainty Equivalent

A small, zero-risk return an investor may trade for a larger potential return with an associated risk. Companies offer certainty equivalent returns on certain investments and use their demand to determine the level of risk an investor will accept for a given return from the company.

## certainty equivalent

The minimum sum of money a person would accept to forgo the opportunity to participate in an event for which the outcome, and therefore his or her receipt of a reward, is uncertain. For example, suppose you are told to draw one card from a full deck of cards. If you draw a red card you win \$100 and if you draw a black card you win nothing. If you would accept \$40 to forgo the selection and possibility of winning, \$40 is the certainty equivalent of the outcome of the event. Certainty equivalents are used in evaluating risk.

## certainty equivalent

see DECISION TREE.
References in periodicals archive ?
Therefore, the MCPT certainty equivalent return difference between the constant mix and the guaranteed contracts is even larger in this case.
We regress subjects' choice (\$0.50 PR or \$2.00 WTA payment) on gender, Task-2 performance, Task-l-to-2 performance improvement, Task-2 selfrank, the lottery certainty equivalent, and a task-order dummy.
The closed form solution is characterized by using the certainty equivalent in the team manager's maximization problem.
B.4 can be interpreted as the value of demand information because it represents the difference between certainty equivalents in the presence and absence of demand information.
The VW portfolio in table 3 is for [gamma] = 5, we do not show its results for other relative risk aversion because the only value that respond to a variation in [gamma] is the certainty equivalent, which will be shown during the discussion.
We use [H.sub.T-1,j] to express the certainty equivalent of the hedge fund investment at node (T - 1, j), so that the investor is indifferent between staying in the fund at node (T - 1, j) and exchanging for cash equal to [H.sub.T-1,j], which is then deposited in a risk-free account.
The partners' mean response to the Certainty Equivalent litigation scenario, i.e., the dollar amount they would be willing to pay to settle and to avoid having the case go to the jury, was \$460,000.
The certainty equivalent rate of return is defined from these in equation (2).
In that context, Bernoulli unveiled the notion of a certainty equivalent, a guaranteed cash flow that we would accept instead of an uncertain cash flow and argued that more risk averse investors would settle for lower certainty equivalents for a given set of uncertain cash flows than less risk averse investors.
The principal minimizes the total expected payments subject to the following constraints: First, agent i receives at least [[theta].sub.i], the certainty equivalent associated with his next best employment opportunity, i.e., the contract is individually rational ([IR.sub.i]).
Note that Q is nothing but the consumer's certainty equivalent income in the second period.
I believe that Karp/Perloff assumption of risk-neutrality imparts a bias to their conclusions.(8) It is a bias that I have tried to avoid by exploiting the concept of certainty equivalent in the decision-making calculus of the market participants.

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