{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ju-imicro-Ch13 - Chapter Thirteen Risky Assets Main Issue...

Info iconThis preview shows pages 1–16. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Thirteen Risky Assets
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Main Issue Mean-Variance Utility Budget Constraints for Risky Assets Measuring Risk Capital Asset Pricing Model
Background image of page 2
Mean of a Distribution A random variable (r.v.) w takes values w 1 ,…, w S with probabilities π 1 ,..., π S ( π 1 + · · · + π S = 1). The mean (expected value) of the distribution is the average value of the r.v.; E [ ] . w w w s s s S = = = μ π 1
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Variance of a Distribution The distribution’s variance is the r.v.’s av. squared deviation from the mean; Variance measures the r.v.’s variation. var [ ] ( ) . w w w s w s s S = = - = σ μ π 2 2 1
Background image of page 4
Standard Deviation of a Distribution The distribution’s standard deviation is the square root of its variance; St. deviation also measures the r.v.’s variability. st. dev [ ] ( ) . w w w w s w s s S = = = - = σ σ μ π 2 2 1
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Mean and Variance Probability Random Variable Values Two distributions with the same variance and different means.
Background image of page 6
Mean and Variance Probability Random Variable Values Two distributions with the same mean and different variances.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Preferences over Risky Assets Higher mean return is preferred. Less variation in return is preferred (less risk).
Background image of page 8
Preferences over Risky Assets Higher mean return is preferred. Less variation in return is preferred (less risk). Preferences are represented by a utility function U( μ , σ ). U as mean return μ . U as risk σ .
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Preferences over Risky Assets Preferred Higher mean return is a good. Higher risk is a bad. Mean Return, μ St. Dev. of Return, σ
Background image of page 10
Preferences over Risky Assets Preferred Higher mean return is a good. Higher risk is a bad. Mean Return, μ St. Dev. of Return, σ
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Preferences over Risky Assets How is the MRS computed?
Background image of page 12
Preferences over Risky Assets How is the MRS computed? dU U d U d U d U d d d U U = + = = - = - ∂μ μ ∂σ σ ∂μ μ ∂σ σ μ σ ∂σ ∂μ 0 / / .
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Preferences over Risky Assets Mean Return, μ St. Dev. of Return, σ Preferred Higher mean return is a good. Higher risk is a bad. d d U U μ σ ∂σ ∂μ = - / /
Background image of page 14
Budget Constraints for Risky Assets Two assets. Risk-free asset’s rate-or-return is r f . Risky stock’s rate-or-return is m s if state s occurs, with prob. π s .
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 16
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}