A risk premium, RP, can be computed with the following formula, where I₁ and I₂ are the two payoffs to a lottery, with probabilities p and (1-p), respectively : A) p(I₁) + (1-p)I₂ = RP B) pU(I₁) + (1-p)U(I₂) = RP C) pU(I₁) + (1-p)U(I₂) = U(EV-RP) D) U(EV) = RP

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The risk premium is the difference between the expected value of a lottery and the certainty equivalent. The certainty equivalent is the amount of money that a person would be willing to accept for sure in lieu of the lottery. The expected value of a lottery is the average amount of money that a person would expect to win if they played the lottery many times. The risk premium is the amount of money that a person is willing to pay to avoid the risk of losing money in a lottery.

A Risk Premium, RP, Can Be Computed with the Following