FNCE30001 Chapter Notes - Chapter 6: Risk Aversion, Capital Budgeting, Credit Event
29 Jun 2020
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Document Summary
Expected value = probability-weighted average of all possible outcomes. Random variable = variable whose outcome has not yet been determined. A random variable is defined by the probability distribution of its possible outcomes. Fair bet = a bet that costs its expected value. E(x) = sum of [p(each outcome) x value of each outcome] Standard deviation = square root of the sum of squared deviations from the mean. Variance = expected value of the squared deviations. Risk-neutral = investors are willing to write or take any fair bet. Risk-averse = would not invest in the more risky alternative if both the risky and safe alternatives offer the same expected rate of return. Financial markets can spread risk across many investors so lower aggregate risk aversion than individual investors. Do not consider common risk, wherein many bonds would default at the same time. Rating agencies are not liable for their ratings or perspectives even if they deliberately deceive investors.
