Let us consider an agent of initial wealth $w_0$ whose utility function is $u(x)=\sqrt{x}$. This individual faces a risk of loss $Z$ which occurs with probability $p$.
It is assumed that $w_0=60000$, $Z=10000$ and $p=0.1$. What is the certainty equivalent for the risk incurred by the individual? What is his risk premium? Interpret.
For the certainty equivalent, I have found:
$\mathbb{E}(u(w_0+L))=u(w_0+c)\iff c=(0.1\sqrt{50000}+0.9\sqrt{60000})^2-60000\approx-1040.99$
How can this result be interpreted?
Same for the risk premium:
$\mathbb{E}(u(w_0+L))=u(w_0+\mathbb{E}(L)-\pi)\iff \pi\approx60040.99$
Thanks.