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Would you a b b be indierent between the two

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Unformatted text preview: ky is Disney? A look at the past… 74 Returns on Disney - 2008- 2013 25.00% Average monthly return = 1.65% Average monthly standard deviaJon = 7.64% Average annual return = 21.70% Average annual standard deviaJon = 26.47% 20.00% 15.00% 10.00% 5.00% 0.00% - 5.00% - 10.00% - 15.00% - 20.00% Aug- 13 Jun- 13 Apr- 13 Feb- 13 Dec- 12 Oct- 12 Aug- 12 Jun- 12 Apr- 12 Feb- 12 Dec- 11 Oct- 11 Aug- 11 Jun- 11 Apr- 11 Feb- 11 Dec- 10 Oct- 10 Aug- 10 Jun- 10 Apr- 10 Feb- 10 Dec- 09 Oct- 09 Aswath Damodaran Aug- 09 Jun- 09 Apr- 09 Feb- 09 Oct- 08 Dec- 08 - 25.00% 74 Do you live in a mean- variance world? 75 ¨༊  Assume that you had to pick between two investments. They have the same expected return of 15% and the same standard deviaJon of 25%; however, investment A offers a very small possibility that you could quadruple your money, while investment B’s highest possible payoff is a 60% return. Would you a.  b.  b.  ¨༊  be indifferent between the two investments, since they have the same expected return and standard deviaJon? prefer investment A, because of the possibility of a high payoff? prefer investment B, because it is safer? Would your answer change if you were not told that there is a small possibility that you could lose 100% of your money on investment A but that your worst case scenario with investment B is - 50%? Aswath Damodaran 75 The Importance of DiversificaJon: Risk Types 76 Figure 3.5: A Break Down of Risk Competition may be stronger or weaker than anticipated Projects may do better or worse than expected Exchange rate and Political risk Interest rate, Inflation & news about economy Entire Sector may be affected by action Firm-specific Actions/Risk that affect only one firm Market Affects few firms Firm can Investing in lots Acquiring reduce by of projects competitors Affects many firms Diversifying across sectors Investor...
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