COMMERCE 4AF3 Lecture 2: chapter 3 notes
24 Jan 2019
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Bill has two investment options; shares or bonds. We"re making assumption that bill and other investors are risk averse meaning they"re trying to limit risk of investing. We introduce concept of utility when people are risk averse. Square root of 2 is 1. 4 and square root of 1 is 1. This means payoff increased by one dollar, but utility only increased by 40%) Based on expected utility, it seems like he should buy bonds since the eu is 15 over: in reality, most people would choose to buy stocks. Investors will seek out more information about the company to analyze it better and the utility will increase. We use bayes" theory to calculate posterior state probabilities. Given the company has gn, also has high-performance state. Financial statements are highly informative and they can provide a lot of information to investors. They need to have these qualities above. Information; evidence that has the ability to influence decisions.
