Ch 7- personal Flashcards
What is risk
Outcome that is uncertain
What is expected return
Average return of a gamble based on probabilities
Standard deviation
Shows how dispreses the posisble otuocmes are σ
Quantifies the risk related to the gamble
What is the marginal utility
Additional utility from income increasing by 1$
Risk averse
Marginal utility decreases as income increases
Prefers certain income over risky income of eqwual value
Would prefere $100 risk free than 50% chance of winning 200$ and 50% chance of winning 0$
Risk neutral
Marginal utility is constant as income increases
Indeferent between certain income and rsky income of equal value
Risk loving
Marginal utilty increases as income increases
Woudl prefer a risky return over a certain return of equal value
Expected utility
Utility expected from an uncertain event
Risk premium
Differece between the expected return of a risky event ad the risk free income for the same utility
Risk averse: how much tehy wants to pay to avoid risk
Risk loving : how much you have to give for them not to take the risk
Formula for insurance premium
Payout x Probability of payout
What is a risky asset
Asset providing uncertain returns to it’s owners
Name 3 risky assets
- Stocks
- Corporate bonds
- Real estate
What is a risk free assets
Provides certain retuns to its owner
Name 2 risk free assets
- government bonds
- treasury bills
Budget line
Shows the different risk-return combinations an investor can achieve by constructing a portofilio of risky adn risk free assets
How do you find the slope of the budget line
By using the risk-free rate and the market portfolio
