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Unformatted text preview: Chapter 5 Risk Chance that an unfavorable event will occur Investment risk is the probability of earning less than expected The greater the chance of low or negative returns, the riskier the investment Defined by Cecchetti – a measure of uncertainty about the future payoff of an investment, measured over some time and relative to a benchmark Measuring risk requires list of all possible outcomes chance of each one occurring (probability) – value btw 0 and 1 Possibility, Probability, and Expected Value – toss 2 coins A risk free asset is an investment whose future value of known with certainty and whose return is the risk free rate of return If the risk return is 5%, a $1000 risk free investment will pay $1050 If there is a chance that the payoff will be either more or less than $1050, the investment is risky The variance is defined as the probability weighted averaged of the squared deviation of the possible outcomes from their expected value The standard deviation is the square root of the variance, the higher the deviation is the higher the risk...
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This note was uploaded on 10/14/2009 for the course ECON 330 taught by Professor Neri during the Spring '08 term at Maryland.
- Spring '08