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Unformatted text preview: the case of treasury bonds, all would be lost. To understand why riskier investments offer a premium, it is necessary to make some assumptions describing the preferences and behavior of investors. Most financial models begin with the assumption that investors are risk averse. Risk aversion does not imply that investors always shun risk. Instead, risk aversion means that investors require compensation for taking risk. The years 2000- 2001 witnessed a decline in the value of most international stock indexes, while bonds generally posted above-average returns. Yet many investors persist in holding stocks in their investment portfolios. These investors presumably anticipate that stocks will continue to earn higher average returns than bonds, providing compensation for the higher risks associated with equity securities....
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.
- Spring '11