Finance Midterm #2
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the failure of one company leads to the failure of others, ths risk can't be diversified away.
the potential for unexpected events to occur.
the tendency to avoid additional risk.
most people will demand a higher rate of return if there is a higher risk.
chance, or probability, of an unexpected outcome.
the mean of the probability distribution of possible outcomes.
more willing to take on risk.
What does standard devieation indicate?
the likelihood that an outcome different from what's expected will occur.
a numerical indicator of how widely dispersed the possible values are around a mean.
more dispersed = higher std. dev. = more risk
Expected Value (Mean) Equation
mu = Sum(V x P)
Standard Deviation Formula
sigma = SQRT[Sum P(V - mu)2]
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