Risk, Return and Portfolio Theory Flashcards
Why do most people take risks
Most do not enjoy risk for its own sake.
•They are prepared to take a risk if the rewards are sufficiently high to compensate for the discomfort involved in taking that risk.
Business risks (volatility and uncertainty)
Unfortunately, business volatility, by its very nature, cannot be foreseen with certainty
•We cannot know when costs and revenues will swing in the future
•We have to analyse potential future gain and loss as an exercise in uncertainty
What is an expected value- give a coin toss example
An expected value is an average or mean value, weighted by probability
It represents the potential outcome over lots of trials.
•Eg If we did the coin flip millions of times, the value of gain/loss is zero.
What is a fair game
A fair game is a bet in which the participant, over a large series of bets is neither better nor worse off.
•In fact the coin toss is a special kind of bet called a fair game.
Example of fair game
coin toss is a special kind of bet called a fair game.
Risk averse person and fair game
A risk averse person would not take a fair bet or indeed a business risk which was analogous to a fair bet. Though they are no worse off, they would rather live without the uncertainty.
