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Lecture 84

ECON 1020 Lecture 84: Lecture 84

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ECON 1020
Ryan A.Compton

o82 If there is a price difference, we should identify that, and buy low and sell high to balance it Arbitrage opportunities should close quickly because people should act quickly on it Example: nonfinancial example o Hockey stick everywhere is 200 o At one store, hockey stick is 104.99 Can arbitrage by buying the sticks for 104.99, and sell them for 200 Example: financial example Stocks listed on two exchanges (two different cities) o After the exchange rate, the stocks should be the same price If higher or lower in one place over the other, you can buy in one place and sell in the other which is arbitrage Risk and Financial Investments: Risk: never know with certainty what future payments on an asset will be Portfolio Diversification: Dont put all your eggs in one basket Involve in multiple portfolios to diversify some risk An individual investments overall risk divided into two components: 1. Diversifiable risk (idiosyncratic risk) o 2. Nondiversifiable risk (systemic risk) Comparing Risky Investments: Average expected rate of return: the probability weighted average of the investments possible future rates of return Example: Investment has 75 profitability of generating 11, and 25 probably of generating 15
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