Categorize the issues of Knight
Categorize the issues of Knight.
Expert
We can categorize matters, following Knight, as given here:
1. For ‘risk’ the probabilities which given events will happen in the future are measurable and known, that is there is randomness but along with an identified probability distribution.This can be further divided.
(a) A priori risk: as the outcome of the roll of a fair die(b) Estimable risk: the probabilities can be estimated by statistical analysis of the past, for illustration, the probability of a one-day fall of 10 percent in the S and P index
2. With ‘uncertainty’ the probabilities of future events cannot be estimated or calculated.
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Who proposed a scientific foundation for Brownian motion?
Illustrates an example of delta hedging.
Explain an example of superhedging.
Otobai Motor Company is currently paying a dividend of $1.40 per year. The dividends are expected to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter forever. What is the vlaue of its current stock price? Assuming that the discount rate is 10%.{Hint: pages 84-
Explain how and why to resolve a “ranking conflict” between the internal rate of return and the net present value.
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How is absolute risk aversion function defined?
What is Sharpe ratio?
Discuss risk from the perspective of the CAPM (Capital Asset Pricing Model).
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