Chapter 11:
Probability distribution of its returns = possible outcomes
Risk-free rate- the rate of return that can be earned with certainty
Risk Premium- extra return in excess of the risk-free return
Risk Aversion- how unwilling is an investor to accept
DistributionofTerminalStockPrice
Derivatives
Spring2014
ConvergenceofOptionPrices
Derivatives
Spring2014
StockPriceAssumptions
ConsiderastockwhosepriceisS(0)
InashortperiodoftimeoflengthT,thereturnon
thestockisnormallydistributed:
S (T )
ln(
) N T , 2T
S
Finance 4763
Fall 2013
Study guide #1
risk preferences of an individual
risk neutral doesnt really care about risk, more concerned
about returns
indifference indifferent if all options offer the same return.
risk averse very concerned about risk. The incr