IFT_Chapt4_sli - 4.1 Measuring Risk Aversion 4.2...

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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Intermediate Financial Theory Chapter IV. Measuring Risk and Risk Aversion June 26, 2006 Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Utility function Indifference Curves Measuring Risk Aversion U ( Y + h ) U ( Y ) U [0.5( Y + h ) + 0.5( Y h )] 0.5 U ( Y + h ) + 0.5 U ( Y h ) U ( Y h ) Y Y h Y + h Y tangent lines Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Utility function Indifference Curves Indifference Curves c * 1 c 1 c 2 c * 2 State 2 Consumption State 1 Consumption (c* 2 + c 2 ) /2 EU ( c) = k 2 EU ( c) = k 1 (c * 1 + c 1 )/ 2 I 1 I 2 Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Absolute Risk Aversion and the Odds of a Bet Relative Risk Aversion in Relation to the Odds of a Bet Arrow-Pratt measures of risk aversion and their interpretations (i) absolute risk aversion = - U 00 ( Y ) U 0 ( Y ) R A ( Y ) (ii) relative risk aversion = - YU 00 ( Y ) U 0 ( Y ) R R ( Y ) . Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Absolute Risk Aversion and the Odds of a Bet Relative Risk Aversion in Relation to the Odds of a Bet Absolute risk aversion = - U 00 ( Y ) U 0 ( Y ) R A ( Y ) π ( Y , h ) = 1 / 2 + ( 1 / 4 ) hR A ( Y ) , (1) Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Absolute Risk Aversion and the Odds of a Bet Relative Risk Aversion in Relation to the Odds of a Bet Relative risk aversion = - YU 00 ( Y ) U 0 ( Y ) R R ( Y ) . π ( Y , θ ) = 1 2 + 1 4 θ R R ( Y ) . (2) Intermediate Financial Theory
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4.1 Measuring Risk Aversion 4.2 Interpreting the Measures of Risk Aversion 4.4 Risk Premium and Certainty Equivalence 4.5 Assessing an Investor’s Level of Relative Risk Aversion 4.6 The Concept of Stochastic Dominance 4.7 Mean Preserving Spreads 4.8 Key Concepts Jensen’s Inequality Certainty Equivalent 4.4 Risk Premium and Certainty Equivalence
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IFT_Chapt4_sli - 4.1 Measuring Risk Aversion 4.2...

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