Financial economics/Tutorials: Difference between revisions
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and β is the covariance of the asset's return with market's return divided by the variance of the market's return. | and β is the covariance of the asset's return with market's return divided by the variance of the market's return. | ||
(for a proof of this theorem see David Blake ''Financial Market Analysis'' page 297 McGraw Hill 1990) | |||
==Gambler's ruin== | ==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: | 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: | ||
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where p = (1 - q), and q ≠ 1/2 | 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) | (for a fuller exposition, see Miller & Starr ''Executive Decisions and Operations Research'' Chapter 12, Prentice Hall 1960) | ||
Revision as of 15:10, 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)
and β is the covariance of the asset's return with market's return divided by the variance of the market's return.
(for a proof of this theorem see David Blake Financial Market Analysis page 297 McGraw Hill 1990)
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)