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Copyright © 2006 Thomson Learning 27 The Basic Tools of Finance.
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Copyright © 2006 Thomson Learning 27 27 The Basic Tools of Finance
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Transcript of Copyright © 2006 Thomson Learning 27 The Basic Tools of Finance.
Copyright © 2006 Thomson Learning
2727The Basic Tools of Finance
Figure 1 Risk Aversion
Wealth0
Utility
Currentwealth €1,000
gain€1,000loss
Utility lossfrom losing€1,000
Utility gainfrom winning€1,000
Copyright©2004 South-Western
Figure 2 Diversification
Number ofStocks inPortfolio
49
(More risk)
(Less risk)
20
0 1 4 6 8 10 20 40
Risk (standarddeviation of
portfolio return)
Aggregaterisk
Idiosyncraticrisk
30
Copyright©2004 South-Western
Figure 3 The Trade-Off Between Risk and Return
Risk(standarddeviation)
0 5 10 15 20
8.3
3.1
Return(percentper year)
50%stocks
25%stocks
Nostocks
100%stocks
75%stocks
Copyright©2004 South-Western
