Financial economics/Tutorials

The Capital asset pricing model

The rate of return,r, from an asset is given by

r = r_f + β(r_m - r_f)

where

r_{f is the risk-free rate of return}

r_{m  is the equity market rate of return}

and r_m - r_f 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) Small TextSmall TextSmall TextSmall Text