ch06 - 6-1 Lecture II(Chapter 6(7th/8th/9thedition 6-2 6-3...

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Unformatted text preview: 6-1 Lecture II (Chapter 6 (7th/8th/9thedition)) 6-2 6-3 FIN 275 (Part I) Lecture II – p. 3 W = $100W1= $150 Profit = $50 W2= $80 Profit = $-20p = .61-p = .4 E(W) = pW1+ (1-p)W2 =.6 (150) + .4(80) = 122 σ2 = p[W1- E(W)]2+ (1-p) [W2- E(W)]2= .6 (150-122)2+ .4(80-122)2= 1,176 σ= 34.293Risk - Uncertain Outcomes 6-4 FIN 275 (Part I) Lecture II – p. 4 W = 100W2= 80 Return2= -0.20p = .61-p = .4 E(r) = pr1+ (1-p)r2=.6 (0.50) + .4(-0.20) = 0.22 = .6 (50%) + .4(-20%) = 22% σ2 = p[r1- E(r)]2+ (1-p) [r2- E(r)]2== .6 (0.5-0.22)2+ .4(-0.2-0.22)2= 0.1176 ⇒σ= 0.34293= .6 (50%-22%)2+ .4(-20%-22%)2= 1,176%⇒σ= 34.293%Risk - Uncertain Outcomes W1= 150 Return1= 0.50 m 6-5 FIN 275 (Part I) Lecture II – p. 5 p = .61-p = .4 100Risky Inv. Risk Free T-bills WRf=105 ReturnRf= 0.05Risk Premium = E(r) –rRf= 0.22 – 0.05 = 0.17 Risky Investments with Risk-Free Investment W1= 150 Return1= 0.50 W2= 80 Return2= -0.206-6 FIN 275 (Part I) Lecture II – p. 6 Speculation Assumption of considerable business risk in obtaining commensurate gain (i.e. a sufficientrisk premium) Gamble Bet or wager on an uncertain outcome No mention of commensurate gain The difference may be due to “heterogeneous expectations” Two speculators may take the opposites sides of a gamble if they assign different probabilities to the possible outcomes. Risk - Speculation vs. Gambling 6-4 FIN 275 (Part I) Lecture II – p. 4 W = 100W2= 80 Return2= -0.20p = .61-p = .4 E(r) = pr1+ (1-p)r2=.6 (0.50) + .4(-0.20) = 0.22 = .6 (50%) + .4(-20%) = 22% σ2 = p[r1- E(r)]2+ (1-p) [r2- E(r)]2== .6 (0.5-0.22)2+ .4(-0.2-0.22)2= 0.1176 ⇒σ= 0.34293= .6 (50%-22%)2+ .4(-20%-22%)2= 1,176%⇒σ= 34.293%Risk - Uncertain Outcomes W1= 150 Return1= 0.50 m 6-5 FIN 275 (Part I) Lecture II – p. 5 p = .61-p = .4 100Risky Inv. Risk Free T-bills WRf=105 ReturnRf= 0.05Risk Premium = E(r) –rRf= 0.22 – 0.05 = 0.17 Risky Investments with Risk-Free Investment W1= 150 Return1= 0.50 W2= 80 Return2= -0.206-6 FIN 275 (Part I) Lecture II – p. 6 Speculation Assumption of considerable business risk in obtaining commensurate gain (i.e. a sufficientrisk premium) Gamble Bet or wager on an uncertain outcome No mention of commensurate gain The difference may be due to “heterogeneous expectations” Two speculators may take the opposites sides of a gamble if they assign different probabilities to the possible outcomes. Risk - Speculation vs. Gambling 6-7 FIN 275 (Part I) Lecture II – p. 7 Investor’s view of risk Risk Averse Risk Neutral Risk Seeking Who will accept a “fair game”?...
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ch06 - 6-1 Lecture II(Chapter 6(7th/8th/9thedition 6-2 6-3...

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