Overview The Risk - Return Relationship Another fundamental relationship in the study of finance is the relationship between expected return and the expected level of associated risk. The nature of the relationship is that as the level of expected risk increases‚ the level of expected return also increases. The opposite is true as well. Lower levels of expected risk are associated with lower expected returns. This RISK-RETURN RELATIONSHIP is characterized as being a direct relationship
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2. “Personal” part of asset allocation – How should an individual investor choose the best risk-return combination from the set of feasible combinations? 3. Equilibrium – When all investors optimize their portfolios‚ how are asset returns determined in equilibrium? Agenda • • • • • Risk‚ risk aversion‚ and utility Portfolio risk and return Diversification Allocation between one risky and a risk-free asset Optimal risky portfolios and the efficient frontier “OCTOBER: This is one of the
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economic study performed in 2012 by Fryer in the United States found that loss eversion motivates teachers aversion motivates teachers far more then strongly than just the prospect of receiving a reward (cash)‚ despite the net gains being the same to them. The findings of this study indicate that the teachers are deviating from expected utility. This is a result of the theory of loss aversion. The theory of loss eversion was first demonstrated by economist Amos Tversky and Daniel Kahneman. This economic
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BOND PRICING CHAPTER 1 Floating Rate bonds * Floating rate bonds make interest payments that are tied to a measure of current market rates Example: Rate may be adjusted annually to the current T bill rate plus 2% * Major risk involved for floaters is due to the changes in the firm’s financial strength * Yield spread is fixed over life of security however if the firm’s strength deteriorates then investors would demand a greater yield premium * This makes the price of bonds
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more optimistic and risk-tolerant than the lay population. We provide evidence that CEOs’ behavioral traits such as optimism and managerial risk-aversion are related to corporate financial policies. Further‚ we provide new empirical evidence that CEO traits such as risk-aversion and time preference are related to their compensation. & 2013 Elsevier B.V. All rights reserved. JEL classification: G30 G32 G34 Keywords: Managers Attitudes Personality traits Risk-aversion Capital structure
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agent of employee: A transaction cost analysis. Marketing Science‚ 4‚ 234-254. Amihud‚ Y.‚ & Lev‚ B. (1981) Risk reduction as a managerial motive for conglomerate mergers. Bell Journal of Economics‚ 12‚ 605-616. Argawal‚ A.‚ & Mandelker‚ G. (1987) Managerial incentives and corporate investment and financing decisions. Journal of Finance‚ 42‚ 823-837. Arrow‚ K. (1971) Essays in the theory of risk bearing. Chicago: Markham. Barnard‚ C. (1938) The functions of the executive. Cambridge‚ MA: Harvard University
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consistently apply Bayes Rule when updating their expectations‚ and identifies the behavioural attributes that affect asset prices. This thesis extends this literature by examining deviations from the Bayesian model that arise due to i) ambiguity aversion‚ ii) investor sentiment and iii) decision heuristics. Bayesian Updating assumes that investors are able to always estimate a single generating process for expected returns. However‚ in reality investors analyze noisy information
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TABLE OF CONTENTS CONCEPTS OF RISK AND UNCERTAINTY 1 Definition Economic Risk Economic risk is the chance of loss because all possible outcomes and their associated probabilities are unknown.Actions taken in such a decision environment are purely speculative‚ such as the buy and sell decisions made by speculators in commodity‚ futures and option markets. All decision makers are equally likely to profit as well as to lose‚ luck is the sole determinant of success or failure. 2 Definition of
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coefficient between the returns of the two stocks is 0.3. The risk free rate of return is 8%. An investor constructs an optimal risky portfolio with the two stocks BBT and DIS. Let the optimal portfolio weights of DIS and BBT in the risky portfolio be 40% and 60%‚ respectively. The investor decides to construct a complete portfolio with the optimal risky portfolio and risk free asset and decides to allocate 35% of the total investment in risk free asset and 65% of the total investment in the risky
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CFA Institute The End of Behavioral Finance Author(s): Richard H. Thaler Source: Financial Analysts Journal‚ Vol. 55‚ No. 6‚ Behavioral Finance (Nov. - Dec.‚ 1999)‚ pp. 12-17 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4480205 Accessed: 17/04/2009 10:10 Your use of the JSTOR archive indicates your acceptance of JSTOR ’s Terms and Conditions of Use‚ available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR ’s Terms and Conditions of Use provides‚ in part
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