FIN 4414 Lecture Notes - Lecture 20: Mutual Fund, Credit Risk, Market Risk
28 Mar 2017
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> with ability to value optionality: these decisions are used with expected cash flows. > look at comps (comparable company, p/e ratio) B/c higher price to pay if the company goes south. > as it goes towards 0, approaches negative infinity. Negative infinity utility in a company = getting evicted, starvation. Much more drastic than being in positive utility. Worst case = you don"t live on expected cash flows, but instead on realized cash flows. > giving up sure cash flows to prepare for worst cases: risk. > if you"re fixed-cost, this is a big deal. If you"re variable cost, not really a big deal. If you invest personally, a financial advisor will get you a market risk assessment. For a mutual fund company, you try to figure out a quantifiable to evaluate your risk portfolio. Risk that people don"t pay you back.
