Category: asset pricing

  • Risk aversion coefficient – meaning and formula

    Risk aversion coefficient – meaning and formula

    When we discussed investors’ risk preferences, we distinguished between risk-averse, risk-neutral, and risk-seeking behavior. We also explained that risk-averse investors expect compensation for bearing risk, which is called a risk premium. But, how do measure risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an individual dislikes risk. In […]

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  • Arbitrage pricing theory (APT)

    Arbitrage pricing theory (APT)

    In the previous lesson, we learned about the capital asset pricing model (CAPM). According to the CAPM, any risky asset’s expected return depends on its exposure to market risk. So, CAPM is based on the idea that market risk is the sole systematic risk factor. Because systematic risk can’t be eliminated via diversification, risk-averse investors […]

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