204_summer_2009_lecture_24

204_summer_2009_lecture_24 - University of Toronto...

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University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 24 1 S. Ajaz Hussain. sayed.hussain@utoronto.ca
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Last Time ± Risk Premium ± Avoiding Risk ² Insurance ² Actuarially fair insurance ² Credit default swaps ² Interest rate swaps ± Decision making under uncertainty ² Perfect tests ² Imperfect tests ² Value of information S. Ajaz Hussain. sayed.hussain@utoronto.ca 2
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Today ± Investors’ Preferences ± Risk aversion ± Asset Return ± Asset Risk ± Portfolio Return ± Portfolio Risk ± Optimal portfolio allocation S. Ajaz Hussain. sayed.hussain@utoronto.ca 3
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Investor: Preferences S. Ajaz Hussain. sayed.hussain@utoronto.ca 4 Portfolio Return Portfolio Risk
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Investor: Preferences S. Ajaz Hussain. sayed.hussain@utoronto.ca 5 Portfolio Return Portfolio Risk
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S. Ajaz Hussain. sayed.hussain@utoronto.ca 6 Risk Premium (RP) Utility $X X 1 X 2 EV CE A RP A EU A Investor A EU B CE B Investor B RP B Which investor is relatively more risk averse?
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Suppose investor wants to construct portfolio: A single risk free asset Every risky asset Label every risky asset “market” What’s investor’s portfolio allocation problem? S. Ajaz Hussain. sayed.hussain@utoronto.ca
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204_summer_2009_lecture_24 - University of Toronto...

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