ECON 303 Terms.xlsx

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Department
Economics
Course
ECON 301
Professor
Michael Vaney
Semester
Winter

Description
Term Absolute Risk Aversion Adverse Selection American Style Option Annuity Asymmetric Information Bernoulli Utility Function Bond Call Option Capital Asset Pricing Model Certainty Equivalent Consul Bond Correlation Correlation Coefficient Coupon Rate Derivative Asset Diversification Dvidend Efficient Frontier European Style Option Ex-Dividend Exercise (Strike) Price (K) Face Value Full Coverage Indifference Curve Insurance Market Portfolio Market Price of Risk (Sharp Market/Systematic/Non- Maturity (Expiry) Date (T) Moral Hazard Mutual Fund Theorem Net Present Value Options Over Coverage Partial Coverage Perfect Correlation Perpetuity Pooling Premium Portfolio Portfolio Frontier Premium Put Option Put-Call Parity Relative Risk Aversion Replicating Portfolio Risk Averse Risk Loving Risk Neutral Risk Neutral Probabilities Risk Premium Riskless Assets Risky Assets Security Market Line (SML) State Contingent Consumption Bundle State of the World State Space Stock Unique/first specific/non- systematic/diversifiable risk Value of Information Von Neuman-Morgenstern Utility Function Definition Absolute amount of wealth an individual is willing to expose to risk as a function of change in wealth. May be Inability to distinguish between two markets leading to practices which results in the loss of one market. Could be exercised at any time up to T. Stream of cashflow is for a set period of time (T periods). Difference of two perpetuities. Model with economic agents not all possessing the same information. e.g insurance market, used good market, Utility function of wealth. Debt instrument and financial contract where the issuer (e.g. corporation) is obligated to repay the buyer the Right to buy underlying asset. Model outlining asset pricing given a single source of systematic risk. Certain wealth which gives the same utility as a riskier gamble. May be exact or approximated. A bond for which interest is paid indefinitely but the principle not at all. Statistical relationship between 2 or more assets. Ability of 1 asset to predict the behaviour of another. Measures strength of linear relationship between 2 or more assets. -1 < r < 1. Stated interest rate on a bond. Annual rate, but payment may be every 6 months. More frequent payments Financial instrument whos value is derived from an underlying security/asset. e.g. options, futures, forward Holding multiple assets (risky and/or riskless) within 1 portfolio. Distribution of profit to shareholders of a stock. Upper portion of portfolio frontier. Maximizing return (portfolio) subject to specific standard deviation (portfolio). Could only be exercised at T. "Without dividend". Selling of a stock after dividend has been paid (to the seller) for a specific time period. Price specified in options contract. Purchase (call) or sell (put) for K. Amount borrowed as stated on the bond. Issuer may promise interest payments at specific intervals at specific Coverage = Loss. Wb = Wg on the 45 degree line. Pi = gamma. Combination of wealth in the good state and bad state for which a consumer is indifferent between. Transfer of wealth from good state to the bad state. Avoiding risk and variability in wealth. If all assets are priced at S = D > 0 at equilibrium, a mutual fund will consist of all traded assets. Slope of capital market line (BL tangent to efficiency frontier). Ratio of relative prices. Risk common to multiple firms. Cannot be diversified away. Date (T) on or by which the option could be exercised. Undertaking a costly action which alters the probability of bad state. This action is not always observable or All investors, regardless of risk preference, will hold a combination of the riskless asset and the tangency portfolio Sum of present values of incoming and outgoing cash flow. May be used to determine whether to undertake a Financial contract, type of derivative, giving holder the right, but not obligation to buy or sell the underlying asset on Coverage > Loss. Wb > Wg. Usually not allowed. Pi > gamma. Coverage < Loss. Wb < Wg. Occurs because pi < gamma. Two or more assets always behaving in the same fashion. Stream of cashflow is perpectual. Premium based on the weighted average of risk for the population. Holding of assets with specific allocation of wealth in each asset. Return and standard deviation associated with portfolios minimizing standard deviation (portfolio) subject to specific Price of $1 of insurance coverage paid before uncertainty is resolved such that each gamma payed in the good state = $1 in bad state. Paying a premium decreases wealth in in good state by gamma and increase wealth in bad Right to sell underlying asset. Relationship between put and call options on the same underlying security with same T and K. Percentage of wealth an individual is willing to expose to risk as a function of change in wealth. May be constant, increasing, or decreasing. Combination of underlying and risk free bond which gives the exact same payoff at T as the call option. Consumer who likes high expected wealth with less variability (closer to the 45 degree line). Willing to give up some expected wealth for decreased variability. Consumer who likes variability and high expected wealth. Willing to give up wealth in the bad state for more in the Consumer who likes high expected wealth and does not care about variability. Indifferent between two bundles of equal expected wealth. Wb and Wg are perfect substituteds (not necessarily 1:1). Linear downward sloping Wealth consumer is willing to give up to decrease the risk to 0. E{U(W)} - U(W^CE). Assets with same return in different states of the world. Assets with different returns in different states of the world. Curve showing the expected return of an asset (or mutual fund) given the relative riskiness of that asset as Wealth of each of the states of the world with probability of each state. Description of 1 possible resolution of uncertainty in choice under uncertainty. Wealth in the good state vs. wealth in the bad state - i.e. indifference curve. Financial contract entailing holder to share the ownership of a firm (control rights) and sometimes share the profits Firm-specific risk which could be diversified away. Value may be associated with knowing which state will prevail in the future if IT WILL A
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