Financial economics/Tutorials: Difference between revisions
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==The Capital | ==The Capital Asset Pricing Model== | ||
The rate of return,r, from an asset is given by | The rate of return,r, from an asset is given by | ||
::::r = ''r''<sub>f </sub> | ::::r = ''r''<sub>f </sub> β(''r''<sub>m </sub> - ''r''<sub>f</sub>) | ||
''r''<sub>f is the risk-free rate of return | ''r''<sub>f</sub> is the risk-free rate of return | ||
''r''<sub>m is the equity market rate of return | ''r''<sub>m</sub> is the equity market rate of return | ||
and ''r''<sub>m </sub>- ''r''<sub>f</sub> is known as the ''equity risk premium | (and ''r''<sub>m </sub>- ''r''<sub>f</sub> is known as the ''equity risk premium'') | ||
==Gambler's ruin== | ==Gambler's ruin== | ||
Revision as of 12:20, 29 February 2008
The Capital Asset Pricing Model
The rate of return,r, from an asset is given by
- r = rf β(rm - rf)
rf is the risk-free rate of return
rm is the equity market rate of return
(and rm - rf is known as the equity risk premium)
Gambler's ruin
If q is the risk of losing one throw in a win-or-lose winner-takes-all game in which an amount c is repeatedly staked, and k is the amount with which the gambler starts, then the risk, r, of losing it all is given by:
- r = (q/p)(k/c)
where p = (1 - q), and q ≠ 1/2
(for a fuller exposition, see Miller & Starr Executive Decisions and Operations Research Chapter 12, Prentice Hall 1960)