MGT 181 Lecture Notes - Lecture 5: Risk-Free Interest Rate, United States Treasury Security, Russell 2000 Index
25 Dec 2015
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Document Summary
The financial markets allow companies, governments and individuals to increase their utility. Savers have the ability to invest in financial assets so that they can defer consumption and earn a return to compensate them for doing so. Borrowers have better access to the capital that is available so that they can invest in productive assets. Financial markets also provide us with information about the returns that are required for various levels of risk. Historical returns: s&p 500 - 11. 5%; russell 2000 - 20. 5%; us treasury bonds - 5. 2%; us. Risk premium: the extra" return earned for taking on a risk. Treasury bills are considered to be risk free. The risk premium is the return over and above the risk free rate. Variance and standard deviation measure the volatility of asset returns. The greater the volatility, the greater the uncertainty. Historical variance = sum of squared deviations from the mean/ (observances -1) Standard deviation = square root of the variance.
