In this framework, the certainty equivalent
is a representation of the cyclist's utility function.
Investors exercise when the current NAV exceeds the certainty equivalent
of holding the hedge fund.
This Variable Certainty Equivalent
[VCE] approach is one of a general class of value or utility elicitation options known as indifference methods.
We find that for the "moderately" risk-averse retiree, the certainty equivalent
of the 100 percent stock allocation is substantially greater than the certainty equivalent
of the life cycle allocation--$584,000 compared to $403,000.
Life & Savings NBV increased by 16%, as the time value of O&G on new business was more than offset by the positive impacts of certainty equivalent
valuation and other adjustments.
Use of (1), (5), (4a) and (5a) yields the following expression for the certainty equivalent
consumption, [Mathematical Expression Omitted]:
If the buyer's holding period for purposes of computing the uncertain appreciation in the art work is future time t, he will offer a price at time 0 that will maximize the net certainty equivalent
of his investment return.
Suppose, for example, we consider the certainty equivalent
of a risky investment yielding an annual rate of return of 20 percent with probability .
For any x in [min, max] and any F in D[min, max], x is the certainty equivalent
of F if and only if V(F) = V([G.
To understand this result, let w be the certainty equivalent
(see Pratt ) of the risky reemployment wage, so that w is defined by EU(w + b) = U(w + b).
It was Selden[8; 9] who developed a nonexpected utility maximizing approach by proposing the Ordinal Certainty Equivalent
(OCE) preferences to distinguish between intertemporal substitution and risk aversion.