Risk aversion

Problem Set 1. Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%. a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so. Explain. Answer: Even though it seems that gold is dominated by stocks, gold might still be an attractive asset to hold as a part of a portfolio.

2 Literature Review 2.1 Insurance demand Economists have long explored the relationship between medical service consumption and health insurance demand, and found that they are dependent upon each other (DING Jihong, ZHU Minglai, 2007). The relationship between the demand of health insurance and the demand of health care of a nation has a strong relationship between, the reason lies behind the fact that health insurance is not bought by a customer in order to obtain a good, but as a mean of

Paper Table of Contents 1. Title Page pg. 1 2. Table of Contents pg. 2 3. Introduction/ Executive Summary pg. 3 4. Modern Portfolio Theory pg. 3 5. Portfolio Management pg. 4 6. Controlling the Risk pg. 5 7. Diversification pg. 6 8. CAPM pg. 7 9. Beta: Advantages and Disadvantages pg. 8 10. Options pg. 10 11. Hedging pg. 11 12. Net Present Value (NPV) pg. 12 13. Technical

decision between gains and losses, or prospect and gambles as it is referred to in their 1979 paper. With every choice we make there are probabilities of losing and probabilities of gaining. In terms of gaining, prospect theory states that people are risk averse. This means that when there are certain options of

decision-making preforms a crucial role in business investment that depends upon the investor’s profit expectation, the availability to finance the investment and the potential cost of asset. (Virlics, 2013) However, risk and uncertainty are the basic terms to the decision-making framework. Risk can be defined as the probability or threat of outcomes or loss that is caused by internal or external vulnerabilities where the probabilities of the possible negative

introducing probabilities and the evaluation of risk. This essay will evaluate The Expected Utility Theory, The Prospect Theory and other potential influences to decision making. As well as state both the strengths and weaknesses of them, in order to determine how they have contributed to the understanding of human thought and decision making. The Expected Utility Theory has been the framework for evaluating an individual’s decision making in cases of risk and uncertainty for the last 50 years (Barbera

descriptive approaches to making decisions with inherent risks. The first part of the essay argues that Expected Utility Theory is a less viable hypothesis to decision making and is fundamentally flawed compared to the Prospect Theory in description and function. Prospect theory is a better model for decision making because firstly, decisions are not often made objectively and can be affected by decision weights. Secondly, individuals are not risk averse as suggested by the utility theory, but are instead

reference. Discussion Question 12: What is the rationale behind the minimax regret rule? What are some less formal and precise methods of dealing with uncertainty? When are these useful? The rationale behind the minimax regret rule is to decrease the risk involved with business decisions and minimize the maximum regret or opportunity cost related from those decisions (Salvatore, 2011). The regret that is linked with the decision is determined by subtracting

preferred decision for each decision maker using the expected utility approach. c) Why don’t decision makers A and B select the same decision alternative? Difference in attitude toward risk. Decision maker A tends to avoid risk, while decision maker B tends to take a risk for the opportunity (Risk taker) of a large payoff. (Can be check by plotting the values). Q#2. Alexander

Play Project In the article of the “Overprotected Kid” written by Hanna Rosin, gives some informational stuff to think back on and all the way to present time. The article gives you something to think about especially with playgrounds and world around us. One that amazed me was about how everything seemed so creative back in the day. They would use stuff as play items that I never even imaged would be fun. Such as stated in the article, “doing mad flips on a stack of filthy mattresses, which makes