Demand for Risky Assets
* Assets
- Something which provides a flow of money or services to its owner.
- The flow of money or services can be explicit or implicit .
* Capital Gain
- An increase in value of an asset, while the decrease is a capital loss.
* Risky & Riskless Assets
- Risky Asset
- Provides uncertain flow of money or services to the owner.
- Examples
- Apartment rent, corporate bonds, capital gains, stock prices
- Riskless Asset
- Provides flow of money or services which is known with certainty.
- Examples
- Short term government bonds, short term certificates of deposit
* Asset Returns
- Return on an Asset
- The total monetary flow of asset as fraction of its price.
- Real Return of an Asset
- The simple return less the rate of inflation.
* Asset Returns
Expected versus Actual Returns
- Expected Return
- Return which an asset should earn on average
- Actual Return
- Return which an asset earns
- Higher returns are associated with the greater risk.
- The risk averse investor should balance risk relative to return
* Risk and Budget Line
Expected return, RP, increases as the risk increases.
The slope is price of risk or risk-return trade-off.
Choosing Between Risk and Return
The Choices of Two Different Investors
