Lecture6

# Lecture6 - Statistical Review Key Statistical Concepts AEM...

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1 AEM 423 Copyright © 2006 By Vicki Bogan Statistical Review Key Statistical Concepts Key Statistical Concepts ± Risk and Risk Aversion ± Mean / Expected Return ± Standard Deviation, Variance ± Covariance, Correlation

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2 Asset Risk ± The presence of risk means that more than one outcome is possible ± A risk-free asset is an asset with a certain return ± Asset: an item that has the ability or potential to provide future benefits to a firm ± A risky asset is an asset with an uncertain rate of return Expected Return Rule 1 : The expected return for an asset is the probability weighted average return in all scenarios ( µ ) = s s r s P r E ) ( ) ( ) (
3 Variance of Return Rule 2: The variance of an asset’s return is the expected value of the squared deviations from the expected return ] ) ( ) ( )[ ( 2 2 = s r E s r s P σ W = 100 W 1 = 150 (Profit = 50) W 2 = 80 (Profit = -20) p = .6 1-p = .4 Mean: E(W) = pW 1 + (1-p)W 2 = .6 (150) + .4(80) = 122 Variance: σ 2 = p[W 1 -E(W)] 2 + (1-p) [W 2 2 = .6 (150-122) 2 + .4(80-122) 2 = 1,176 Std. Dev.: σ = 34.293 Risk - Uncertain Outcomes

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4 Return on a Portfolio Rule 3:
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## This note was uploaded on 09/03/2009 for the course AEM 4230 taught by Professor Bogan,v. during the Fall '08 term at Cornell.

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Lecture6 - Statistical Review Key Statistical Concepts AEM...

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