Certainty Equivalent

Problem

Compute the certainty equivalent of a gamble under CRRA utility.

For gamma equal to 1 use exp(sum(probs[i] * ln(wealths[i]))). Otherwise return (sum(probs[i] * wealths[i] ** (1 - gamma))) ** (1 / (1 - gamma)).

Hint

The certainty equivalent is the inverse utility of the expected utility.

case 1

in: [[100,50],[0.5,0.5],2]

expected: 66.66666666666667

case 2

in: [[100,50],[0.5,0.5],1]

expected: 70.71067811865478

case 3

in: [[10],[1],0.5]

expected: 10.000000000000002

Starter codePython

def certainty_equivalent(wealths, probs, gamma):
    # Your code here
    pass

3 test cases · run your code against them in the editor