IFT_Chapt3_sli - 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite Choice Theory Under Certainty 3.4 Choice

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite: Choice Theory Under Certainty 3.4 Choice Theory Under Uncertainty: An Introduction 3.5 Allais Paradox 3.6 Prospect Theory 3.7 Key concepts and ideas Intermediate Financial Theory Chapter III. Making Choice in Risky Situations July 11, 2006 Intermediate Financial Theory 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite: Choice Theory Under Certainty 3.4 Choice Theory Under Uncertainty: An Introduction 3.5 Allais Paradox 3.6 Prospect Theory 3.7 Key concepts and ideas 3.2 Choosing Among Risky Prospects:Preliminaries A future risky cash flow is modelled as a random variable State-by-state dominance =>incomplete ranking « riskier » Table 3.1: Asset Payoffs ($) Cost at t = Value at t = 1 π 1 = π 2 = 1 / 2 θ = 1 θ = 2 Investment 1-1,000 1,050 1,200 Investment 2-1,000 500 1,600 Investment 3-1,000 1,050 1,600 Intermediate Financial Theory 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite: Choice Theory Under Certainty 3.4 Choice Theory Under Uncertainty: An Introduction 3.5 Allais Paradox 3.6 Prospect Theory 3.7 Key concepts and ideas Table 3.2: State Contingent ROR ( r ) θ = 1 θ = 2 Investment 1 5% 20% Investment 2-50% 60% Investment 3 5% 60% Er 1 = 12.5% ; σ 2 1 = 1 2 (5 – 12.5) 2 + 1 2 (20 - 12.5) 2 = (7.5) 2 , or σ 1 = 7.5% Er 2 = 5% ; σ 2 = 55% (similar calculation) Er 3 = 32.5% ; σ 3 = 27.5% Investment 1 mean-variance dominates 2 Investment 3 does not m-v dominate 1! Intermediate Financial Theory 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite: Choice Theory Under Certainty 3.4 Choice Theory Under Uncertainty: An Introduction 3.5 Allais Paradox 3.6 Prospect Theory 3.7 Key concepts and ideas Table 3.3: State-Contingent Rates of ReturnTable 3....
View Full Document

This note was uploaded on 01/29/2012 for the course ECONOMICS 101 taught by Professor Tikk during the Spring '11 term at University of Toronto- Toronto.

Page1 / 14

IFT_Chapt3_sli - 3.1 Introduction 3.2 Choosing Among Risky Prospects:Preliminaries 3.3 A Prerequisite Choice Theory Under Certainty 3.4 Choice

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online