Finance School of management Riskless asset a security that offers a perfectly predictable rate of return in terms of the unit of account selected for the analysis and the length of the investor's decision horizon For example, if the u s dollars is taken as the unit f account and the trading horizon is half a year, the riskless rate is the interest rate on us Treasury bills maturing after halfa year uesTc
11 Finance School of Management Riskless Asset ❖ A security that offers a perfectly predictable rate of return in terms of the unit of account selected for the analysis and the length of the investor’s decision horizon ❖ For example, if the U.S dollars is taken as the unit of account and the trading horizon is half a year, the riskless rate is the interest rate on U.S Treasury bills maturing after half a year
Finance School of management Rates of Return on Risky Assets Required return depends on the risk of the investment Greater the risk, greater the return Risk premium uesTc 12
12 Finance School of Management Rates of Return on Risky Assets ❖ Required return depends on the risk of the investment. – Greater the risk, greater the return – Risk premium
Finance School of management Security Prices 100000 Stock 10000 Bond Stock mu Bond mu 1000 100 10 0 5 10 15 25 30 Years uesTc 13
13 Finance School of Management Security Prices 10 100 1000 10000 100000 0 5 10 15 20 25 30 35 40 Years Value (Log) Stock Bond Stock_Mu Bond_Mu
Finance School of management Security Prices 100000 Stock 10000 Bond Stock mu Bond mu 1000 100 10 0 5 10 15 25 30 Years uesTc 14
14 Finance School of Management Security Prices 10 100 1000 10000 100000 0 5 10 15 20 25 30 35 40 Years Value (Log) Stock Bond Stock_Mu Bond_Mu
Finance School of management Probabilistic Stock Price Changes Over Time 0.020 0.018 Stock Year 1 Stock Year 2 0.016 Stock Year 3 0014 Stock Year 4 a0.012 Stock Year 5 Stock Year 6 0.010 Stock Year 7 0.008 Stock Year 8 Stock Year 9 0.006 Stock Year 10 0.004 0.002 0.000 200 400 600 800 uesTc 15
15 Finance School of Management Probabilistic Stock Price Changes Over Time 0.000 0.002 0.004 0.006 0.008 0.010 0.012 0.014 0.016 0.018 0.020 0 200 400 600 800 Price Probability Density Stock_Year_1 Stock_Year_2 Stock_Year_3 Stock_Year_4 Stock_Year_5 Stock_Year_6 Stock_Year_7 Stock_Year_8 Stock_Year_9 Stock_Year_10