Chap006 - Investments Bodie, Kane and Marcus CHAPTER 6...

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Unformatted text preview: Investments Bodie, Kane and Marcus CHAPTER 6 CHAPTER 6 Risk Aversion Risk Aversion and Capital and Capital Allocation to Allocation to Risky Assets Risky Assets 6-2 Risk and Risk Aversion Speculation Considerable risk Sufficient to affect the decision Commensurate gain Gamble Bet or wager on an uncertain outcome 6-3 Risk Aversion and Utility Values Risk averse investors reject investment portfolios that are fair games or worse These investors are willing to consider only risk-free or speculative prospects with positive risk premiums Intuitively one would rank those portfolios as more attractive with higher expected returns 6-4 Table 6.1 Available Risky Portfolios (Risk-free Rate = 5%) 6-5 Utility Function Where U = utility E ( r ) = expected return on the asset or portfolio A = coefficient of risk aversion 2 = variance of returns 2 1 ( ) 2 U E r A =- 6-6 Table 6.2 Utility Scores of Alternative Portfolios for Investors with Varying Degree of Risk Aversion 6-7 Figure 6.1 The Trade-off Between Risk and Returns of a Potential Investment Portfolio, P 6-8 Estimating Risk Aversion Observe individuals decisions when confronted with risk Observe how much people are willing to pay to avoid risk Insurance against large losses 6-9 Figure 6.2 The Indifference Curve Figure 6....
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Chap006 - Investments Bodie, Kane and Marcus CHAPTER 6...

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