A fair gamble on average
yields zero monetary profit.
A risk-neutral person is
interested only in whether the
odds yield a profit on average.
A risk-averse person will refuse
a fair gamble.
A risk-lover bets even when
the odds are unfavourable.
People’s tastes exhibit a
diminishing marginal utility.
Successive equal rises in
consumption quantities add
less and less to total utility.
Risk pooling aggregates
independent risks to make the
aggregate more certain.
Risk-sharing works by
reducing the stake.
Moral hazard is the use of
inside information to exploit the
other party to a contract.
Adverse selection occurs
when individuals use their inside
information to accept or reject a
contract. Those who accept are
not an average sample of the
population.
Dividends are the regular
payments of profit to
shareholders.The capital gain
(loss) is the rise (fall) in the
share price while it is held.
Diversification pools risk
across several assets whose
individual returns behave
differently from one another.
An efficient asset market
already incorporates existing
information properly in asset
prices.
A spot market deals in
contracts for immediate delivery
and payment. A forward
market deals in contracts
made today for delivery of
goods at a specified future date
at a price agreed today.
Hedging is the use of forward
markets to shift risk on to
somebody else.
A speculator temporarily holds
an asset in the hope of making
a capital gain.
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