ASSET PRICING
JUNE 23
rd
, 2009
Lauren Heller
Econ 423, Financial Markets
The Plan for Today
Homework Quiz #1
Risk and Uncertainty:
A Review
Determinants of Asset Demand
Supply and Demand in
the Bond Market
Investing and Uncertainty
In many situations, investors must make
choices that involve a certain amount of
risk
.
What types of risk have we discussed so far?
Risk in Economics and Finance
Many people refer to a risk as the probability of
loss or injury, but we don’t always have to think
of it in that way.
Risk can refer to the probability of a loss or a gain.
Example
–
Winning the Lottery
Risk and Probability
To measure risk we must know:
All of the possible outcomes of a situation
The
probability
or likelihood that each outcome
will occur
Probabilities help us to find two separate
measures of risky choices:
Expected Value
Variability

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