3.2 Risk and Return Flashcards
1
Q
Assets returns equation
A
2
Q
Implications of asset return equation
A
Return on an asset is a random variable, characterized by
- all possible outcomes, and
- probability of each outcome (state)
3
Q
Expected rate of return equation
A
4
Q
Expected return relation to risk-free rates and premiums
A
5
Q
How do we denote risk mathematically?
A
6
Q
Risk and probability distributions
A
7
Q
Assumptions of investor preferences
A
8
Q
How can we show the risk-return trade-off diagrammatically?
A
9
Q
Three rules for expected variables
A
10
Q
Two rules for variance
A
11
Q
Two rules for covariance
A
12
Q
What are three central facts about financial markets?
A
- Returns on riskier assets have been higher than on less risky assets. [This makes sense intuitively].
- Riskier assets can often have correlated returns with other risky assets.
- Risky assets do not have serial correlation.
