FIN 260 Lecture Notes - Lecture 39: Consolidated Edison, Capital Asset Pricing Model
Document Summary
Benefits from diversification: free lunch from diversification: Less risk w/out giving up return: coin flip method: You are given 2 scenarios: you are offered a chance to flip a coin 1 time. If you get heads, you win ,000; if you get tails, you pay ,000. 50/50 chance of getting heads/tails, your expected return follows this formula: ,000 (. 5) + (-,000) (. 5) =,000: you are offered the chance to flip a coin 100 times. If you get heads, you win for each heads; if you get tails, you pay for each tails. The expected return would be: (50 heads * ) + 50 tails (-) = ,000. It is possible that you could flip 100 straight heads & win ,000 or flip 100 straight tails & pay ,000, but the odds are extremely low. In reality, the probability is you probably throw around 50 heads. & 50 tails & make a positive return.
