/sci/ - Science & Math » Thread #10759495

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Price of risk?

Anonymous Thu 27 Jun 00:56:50 2019 No.10759495 View Reply Original Report

Quoted By: >>10759505 >>10759649 >>10759671

Is there a simple formula or idea for pricing the risk of an asset? For example, if I can pick between
1. Making $2 on heads and -$1 on tails
2. Making $0.5 on heads or tails
I’d pick 2, but shouldn’t 2 charge a risk premium?

Anonymous

Anonymous Thu 27 Jun 2019 00:59:34 No.10759505 Report

Quoted By: >>10759509

>>10759495
Uh, the expected values aren’t equal, chief.

Anonymous

Anonymous Thu 27 Jun 2019 01:02:47 No.10759509 Report

Quoted By: >>10759685

>>10759505
2*.5-1*.5=.5
.5*1=.5

Anonymous

Anonymous Thu 27 Jun 2019 01:06:16 No.10759516 Report

Quoted By: >>10759527

This is all hashed out in modern microeconomic theory, but risk is essentially a market asset and it’s price is governed by supply, demand, and market clearing considerations

Anonymous

Anonymous Thu 27 Jun 2019 01:09:19 No.10759527 Report

Quoted By:

>>10759516
>governed by supply, demand, and market clearing considerations
i figured that much, and that sounds like a formula. but i've no idea where to even begin. pretty much all i know is sharpe ratio lol

Anonymous

Anonymous Thu 27 Jun 2019 02:25:37 No.10759649 Report

Quoted By:

>>10759495
2 is risk-free, 1 charges a risk premium

Anonymous

Anonymous Thu 27 Jun 2019 02:43:08 No.10759671 Report

Quoted By: >>10759763

>>10759495
Modern financial engineering has the general solutions to these kinds of problems but in your case, not really. You have a risk-free asset and you always want to represent that as a percentage of some initial investment to allow the pricing of all other instruments relative to this one.

Just saying "making 0.5$" is not enough. Something like "making 0.5$ for every 10$ invested" would allow us to price the other instrument based on no-arbitrage.

Anonymous

Anonymous Thu 27 Jun 2019 02:58:45 No.10759685 Report

Quoted By:

>>10759509
This is the correct answer.
Assuming you define risk as how much you more likely to make, both have equal returns.

Anonymous

Anonymous Thu 27 Jun 2019 03:52:45 No.10759763 Report

Quoted By: >>10759766

>>10759671
Ok, let’s say 1 costs $0 and 2 costs $10. What do? Thank you

Anonymous

Anonymous Thu 27 Jun 2019 03:54:27 No.10759766 Report

Quoted By: >>10759809

>>10759763
>let’s say 1 costs $0
That's great. Give me infinitely many of these.

Anonymous

Anonymous Thu 27 Jun 2019 04:28:59 No.10759809 Report

Quoted By:

>>10759766
Lol ok costs $0.01

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