ECO204Y5 Lecture Notes - Lecture 11: Production Function
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: upward sloping for risk-averse individuals: vertical axis --> expected return, horizontal axis --> standard deviation. Different combinations of expected return and standard deviations that give the same level of utility. Low p(cid:396)ice of (cid:396)isk : taki(cid:374)g o(cid:374) (cid:373)o(cid:396)e (cid:396)isk does(cid:374)"t e(cid:395)uate a la(cid:396)ge co(cid:373)pe(cid:374)satio(cid:374) i(cid:374) rp (relative flat price of risk line) High price of risk: increasing risk in your portfolio gives you large returns in the form of rp (relatively steep slope) Figure 1 high price of risk with extremely risk-averse individual. Figure 2 high price of risk with less risk-averse individual. Figure 3 low price of risk with less risk-averse individual. Figure 4 low price of risk with extremely risk-averse individual. Many ways to produce q some are l-intensive. Others are k-intensive: each production function (f) is specific to a given level of technology: when technology advances, you get a new production fu(cid:374)ctio(cid:374) f".
