FBE441_03_Investing_Risky_Asset-revised

FBE441_03_Investing_Risky_Asset-revised - FBE 441-...

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FBE 441- Investments Prof. Rafiqul Bhuyan Risk Aversion and Capital Allocation to Risky Assets Risk and Return, and Risk Aversion Utilization Maximization Theory Capital Allocation to Risky Assets Readings: BKM chapter 6
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Risk and Return High Risk High Return we rational investors expect Reward : higher expected return . Risk : lower (overall) standard deviation .
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3 Investor’s choice (1) Investors prefer more to less (2) Investors are risk-averse Risk averse investors reject investment portfolios that are not offering commensurate rewards or risk premium Intuitively one would rank those portfolios as more attractive with higher expected returns
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4 Risk and Return Example Consider investing $100,000 in risky assets A and B: Investment Decisions: (1) Between A or B, which would you choose? (2) Would you prefer instead a riskless alternative (have $103,000 for sure)? Invest in Asset A Pays $140,000 Pays $80,000 Prob 50% Prob 50% Invest in Asset B Pays $80,000 Pays $120,000 Prob 50% Prob 50%
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5 Risk and Return Contd.
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This note was uploaded on 01/26/2009 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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FBE441_03_Investing_Risky_Asset-revised - FBE 441-...

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