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Unformatted text preview: Finance Time, risk, asset evaluation Time present discounted value Risk Expected value, - Variance (measure of dispersion of possible distribution around the mean),- Correlation (having more than one asset studying whether the return of auto stocks in the US is correlated with auto stocks in Japan),- Insurance (a way to lessen risk for companies)- Asset evaluation Risk aversion- Financial risk is present whenever there is some probability of earning a return on an investment that is less than the amount expected Decreasing marginal utility for risk averse people- Utility is a subjective measure of well-being that depends on wealth Expected return Pi = probability of event happening R = return of asset / project A if event occurs ( estimated return) N = number of possible events Variance = Sum of Pi((Ra E(Ra))^2) Standard deviation = Square root(Variance) N N N r r r r C R r r C R r C R C R PV ) 1 )....( 1 )( 1 )( 1 ( ......
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- Fall '08