FINC314 Lecture Notes - Lecture 11: Money Market Fund, Standard Deviation, Sharpe Ratio

• School: University of Delaware
• Department: Finance
• Course: FINC314
• Professor: Danby Peter

Document Summary

This note begins with a discussion of risk tolerance before culminating with a look at the allocation decision between risky and riskless assets. Risk averse investors reject investment portfolios which are fair games or worse they are only willing to consider risk-free or speculative prospects with positive risk premia. 50/50 chance, or a coin flip for example. Risk neutral investors judge risky prospects solely by their expected rates of return the level of risk is irrelevant meaning that there is no penalty for risk. In all likelihood, it does though you may not realize it right now. Risk loving investors are happy to engage in both fair games and gambles they adjust expected returns upwards to take i(cid:374)to a(cid:272)(cid:272)ou(cid:374)t the (cid:862)fu(cid:374)(cid:863) of (cid:272)o(cid:374)fro(cid:374)ti(cid:374)g the prospe(cid:272)t"s risk. Risk lovers may be described as reckless and rash, but they certainly exist in the world. Rush out of uncertainty, willing to pay for the experience. The same reason why people flock to casinos.