Tag: decision making
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How to calculate payback period in Excel?
In this tutorial, we’ll teach you how to compute both the payback period and the discounted payback period in Excel. If you’ve arrived here from our Youtube channel, click on “Video tutorial and Excel template” section in the Contents box below to download the Excel template. If you’d like to learn more about the payback…
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Payback period
In this lesson, we’ll learn about the (discounted) payback period rule, which is a popular capital budgeting tool that helps corporate managers make investment decisions. We’ll discuss the pros and cons of this rule vis-à-vis the net present value (NPV) rule and will offer a (discounted) payback period calculator as well. What is the “payback…
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Mean-variance optimization
According to modern portfolio theory, investors are concerned about the “mean” and “variance” of asset returns, where the former captures the “centrality” and the latter the “spread” (or “riskiness”) of potential returns. As such, investors engage in mean-variance optimization. That is, they seek the portfolios that offer the best tradeoff between risk and return. In…
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Risk preferences: What’s the opposite of risk averse?
in investmentsAs humans, we have a natural tendency to avoid taking risks when we can, a notion that we refer to as risk aversion. Specifically, when faced with a choice between a safe payoff and a risky one, we’d opt for the latter only if it entails a sufficient risk premium, which is our reward for…
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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 a person’s level of risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an…
