FNCE30001 Lecture 1: Risk Aversion
Nike Aversion Alktums
murmur
Definingoetunuri
Rtbi Po
To
Returnsmay be unknownfuture
return TexpectedreturnELM orrealuidreturn r
Returnsare uncertainbecause therearemanythingswedon't
know
leapectedreturn
ELT Epls flo Note leapected
return averagereturn
where srefers to astateof
themkt
Tls is thereturnin state s
fl sis thelikelihood
ofstates
standarddeviation
Yucatan'ity ofreturns AKA volatility
Elf pls lo EMI Variance
IT fEµ tED standard
deviation
Weoften work withSD because it was the sameunitofmeasurement asreturns
Var 2SD 3
M
oddhiggndwnamy mean µavolatility 0
Benefits tractablelrymmetric onlyneedstwo
parameters
stable
empirically areasonable
feintapproximation
Only Hoooobservations outsideof4Sbs
can male returns to match standardnormal
gIF
canthecomputer
prob wring boat ortables
Marketwithpremium actual return expectedreturn
Areretumsnormallydirtributed
Notforshortperiods
hogreturnsgo
closebuthave fattails
lexpectextreme returns negative as well as
positive
likeness
skew ELF µ3
T
ve skew langur
left tail
veskew tonguerightfaifdownsidemilkunderestimated
downside
mils isoverestimated
hkeronen is not noticeable over long haul
Kurtosis
Thdiates how
fattailsare
ExcessKurton's Elf mtg
Notekurtosisofnormal dirt is 3