LectureIX - Lecture IX: Risk and Investment Through Time I....

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Lecture IX: Risk and Investment Through Time I. Overview of problem and case for neglect A. Solving risk problems and problems with multiple periods have historically been disjoint problems. 1. Modern deterministic investment decisions are well developed. The investor allocates capital among competing alternatives to maximize his wealth. 2. Likewise, adequate theoretical development exists for decision making under uncertainty in a single risky period. 3. Unfortunately, work on the joint problem (a risky investment with flows over several periods) has lagged somewhat. B. Complications and caveats: Several factors complicate the extension of the single period risk model to multiperiod analysis. The complicating factors include the formulation of variance over time, its covariance with other investments, and the exact nature of intertemporal utility. 1. Asset variance through time: Multiple trials of an independent and identical bet through time should yield the same variance.
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This note was uploaded on 07/15/2011 for the course AEB 6145 taught by Professor Moss during the Spring '11 term at University of Florida.

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LectureIX - Lecture IX: Risk and Investment Through Time I....

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