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Micro Theory One > Chapter Eighteen > Flashcards

Chapter Eighteen Flashcards

0
Q

Ex Ante

A

Determined before the state of the world is known.

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1
Q

State of the world

A

A potential set of conditions

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2
Q

Ex Post

A

Determined after the state of the world is known.

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3
Q

Expected Value

A

The average value over all states of the world, with each state weighted by its probability.

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4
Q

Law of large numbers

A

When a gamble is repeated many times, the average outcome is the expected value.

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5
Q

Riskiness

A

Variation in potential outcomes.

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6
Q

Risk Free

A

Having the same value in any state of the world.

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7
Q

Fair odds

A

Odds that reflect the true probabilities of various states of the world.

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8
Q

Diversify

A

To reduce risk

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9
Q

Risk Neutral

A

Caring only about expected value.

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10
Q

Risk Averse

A

Always preferring the least risky among baskets with the same expected value.

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11
Q

Risk Preferring

A

Always preferring the most risky among baskets with the same expected value.

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12
Q

Uninsurable Risk

A

A risk that cannot be diversified.

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13
Q

Future contract

A

A contract to deliver a specified good at a specified future date for a specified price.

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14
Q

Futures market

A

The market for futures contracts.

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15
Q

Spot Market

A

The market for goods for immediate delivery.

16
Q

Spot price

A

Price in the spot market.

17
Q

Speculator

A

One who attempts to earn profits in the futures market by predicting future changes in supply or demand.

18
Q

Returns

A

Gains to the holder of a financial asset, including dividends and increases in the asset’s value.

19
Q

Expected return

A

The expected value of return

20
Q

Standard Deviation

A

A precise measure of risk.

21
Q

Investors

A

Buyers of risky assets

22
Q

Portfolios

A

Combinations of risky assets.

23
Q

Efficient set

A

The northwest boundary of the set of all portfolios.

24
Q

Efficient portfolio

A

A portfolio in the efficient set.

25
Q

Capital asset pricing model

A

A model that assumes that investors care only about expected return and risk, where risk is measured by standard deviation.

26
Q

Market Line

A

The line through a risk free asset and tangent to the efficient set.

27
Q

Market portfolio

A

The point of tangency between the market line and the efficient set.

28
Q

Rational Expectations

A

Expectations that, when held by market participants, lead to behaviour that fulfills those expectations on average.

Micro Theory One (5 decks)

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