Alternatives Mutual Fund Stock Market CDs Bonds Payoff Table Good Economy 900 5,500 1,800 550 State of Nature Fair Economy 650 4,900 880 440 e using the Hurwicz Criterion strategy and an a = 0.55? Poor Economy 440 3,100 630 165
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Hurwicz criterion:
The Hurwicz criterion is a decision-making framework used in finance to evaluate the performance of investment portfolios. Named after economist Leonid Hurwicz, this criterion helps investors determine the optimal asset allocation for their portfolios based on their risk tolerance and investment goals. The Hurwicz criterion is based on the idea that investors should choose the portfolio that maximizes their expected utility, taking into account both the potential returns and risks of each asset class. By using the Hurwicz criterion, investors can create a diversified portfolio that balances risk and reward, leading to better long-term investment performance.
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