6.1 Risk and Risk Aversion
The assumption of considerable investment risk to obtain commensurate gain
> Considerable risk : The risk is sufficient to affect the decision.
> Commensurate gain : A positive risk premium, that is, an expected profit greater than the risk-free alternative.
Gambling <-> Fair game
Risk-averse investors are willing to consider only risk-free or speculative prospects with positive premiums.
U = E(r) - 1/2Aσ^2
- U is the utility value
- A is an index of the investor's risk aversion.
> Risk-neutral : A = 0
> Risk lover : A < 0
- The factor of 1/2 is just a scaling convention.
6.2 Capital Allocation across Risky and Risk-Free Portfolios
The risk- return trade-off available to investors by examining the most basic asset allocation choice : the choice of how much of the portfolio to place in risk-free money market securities versus other risky asset classes.
6.6 Passive Strategies : The Capital Market Line
Two-Fund Separation Theorem. A theory stating that under conditions in which all investors borrow and lend at the risk less rate, all investors will either choose to possess a risk-free portfolio or the market portfolio.
A passive strategy describes a portfolio decision that avoids any direct or indirect security analysis.
The assumption of considerable investment risk to obtain commensurate gain
> Considerable risk : The risk is sufficient to affect the decision.
> Commensurate gain : A positive risk premium, that is, an expected profit greater than the risk-free alternative.
Gambling <-> Fair game
Risk-averse investors are willing to consider only risk-free or speculative prospects with positive premiums.
U = E(r) - 1/2Aσ^2
- U is the utility value
- A is an index of the investor's risk aversion.
> Risk-neutral : A = 0
> Risk lover : A < 0
- The factor of 1/2 is just a scaling convention.
6.2 Capital Allocation across Risky and Risk-Free Portfolios
The risk- return trade-off available to investors by examining the most basic asset allocation choice : the choice of how much of the portfolio to place in risk-free money market securities versus other risky asset classes.
6.6 Passive Strategies : The Capital Market Line
Two-Fund Separation Theorem. A theory stating that under conditions in which all investors borrow and lend at the risk less rate, all investors will either choose to possess a risk-free portfolio or the market portfolio.
A passive strategy describes a portfolio decision that avoids any direct or indirect security analysis.
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