Chapter 15Coping with risk in economic life David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000... Individual attitudes towards risk– is only in
Trang 1Chapter 15
Coping with risk in economic life
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000
Trang 2Individual attitudes towards risk
– is only interested in whether the odds will yield a
profit on average
– will refuse a fair gamble
i.e one which on average will make exactly zero monetary profit
– will bet even when a strict mathematical
Trang 3Risk and insurance
Risk-pooling
make the aggregate more certain
Risk-sharing
By pooling and sharing risks, insurance
allows individuals to deal with many risks
at affordable premiums.
Trang 4Moral hazard and adverse selection
Moral hazard
– is the exploiting of inside information to take
advantage of the other party to a contract
e.g if you take less care of your property because
you know it is insured
Adverse selection
– occurs when individuals use their inside information
to accept or reject a contract, so that those who
accept are not an average sample of the population
Trang 5Portfolio selection
average return on a portfolio of assets
– but dislikes risk.
Diversification
– is a strategy of reducing risk by risk-pooling across
several assets whose individual returns behave
differently from one another.
Beta
– is a measurement of the extent to which a particular
share's return moves with the return on the whole
stock market
Trang 6Efficient asset markets
The theory of efficient markets
– says that the stock market is a sensitive processor of information
– quickly responding to new information
to adjust share prices correctly
An efficient asset market already
incorporates existing information
Trang 7More on risk
specified future date at a price agreed today
else.