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Choice Under Uncertainty - Coggle Diagram

- - - - characterizing a situation in which an insurance premium is equal to the expected payout
    - - although single events may be random and largely unpredictable, the average outcome of many similar events can be predicted
- - - - the value associated with a possible outcome
  - - - both
      - the beliefs of the people involved
      - nature of the uncertain event
    - - Objective probability
        
        the frequency with which certain events tend to occur.
      - Subjective probability
        
        personal experience
  - - - the difference between expected payoff and actual payoff.
      - D = X − E(X)
  - - - Using expected utility E(U)
      - Using standard deviation
      - Using coefficient of variation CV
      - Trade-off between risk and expected return
- - - - Riskless asset
        
        provides a flow of money or services that is known with certainty
      - Risky asset
        
        provides an uncertain flow of money or services
  - - - Real return
        
        its simple (or nominal) return less the rate of inflation
      - Expected return
        
        return that an asset should earn on average
      - Actual return
        
        return that an asset earns
  - - - Extra risk that an investor must incur to enjoy a higher expected return