Evaluating the Opportunity Set Flashcards
what does risk aversion mean
investors like high return but don’t like high risk
is risk aversion linear
no the more risk you take on the more compensation you expect
what does time series analysis of returns mean
we base our future expectations of returns on past returns
what does arithmetic average return tell us
simple average of all holding period returns
what does geometric average return tell us
what was the average compound return over the period
in the industry, what is the assumed type of average unless stated otherwise
arithmetic
when will arithmetic and geometric averages be different
when the returns are volatile
why does the industry mostly use arithmetic average
simplest
highest result
ranking is the same whether you use arithmetic or geometric
what is the risk premium
the extra return on a risky asset over the risk free rate
what is the risk aversion like during a bubble
falls dramatically
looking for fat too little compensation for risks they are taking
what is risk aversion like after a crash
people are highly cautious and expect much more return for extra risk taken on
what is a common measure of risk dispersion
variance
how to measure risk dispersion
variance
how to measure volatility
standard deviation
how to measure the Sharpe ratio
Risk premium / SD of excess returns
