Lecture 2: Risk and Financial Crises

Economics 252, Spring 2011 Prof Ro!ert S"iller, #ale $ni%ersit&

Return

E'pected (alue, )ean, *%erage

E , x+ = x =
E , x+ = x =
x=

prob , x = x i + xi i= 1

f , x+ xdx
., x+ = , xi +
i= 1 n 1- n

xi - n

i= 1

(ariance and Standard /e%iation

%ar, x+ =
2 sx =

i= 1

pro!, x = xi +, xi x + 2

i= 1

, xi x+ 2 - n

Co%ariance
co%, x, y + =

, x x+, y y + - n

i= 1

Correlation
0 * scaled measure of "o1 muc" t1o %aria!les mo%e toget"er 0 21 3 4 3 1

= co%, x, y + -, s x s y +

(ariance of Sum

Stock )arket Le%el, 200022010, 20005100

*pple, 6nc and S7P 500 )ont"l& *d8usted Price First /ecade of 2000s, 20005100

*pple, 6nc and S7P 500 )ont"l& Returns, First /ecade of 2000s

Scatter, *pple %s S7P 500

Same Scatter 1it" Regression Line

Norm al Dis tribution w ith Ze ro M e an 0.45 0.4 0.35 0.3 0.25 f(x) 0.2 0.15 0.1 0.05 0 -15 -10 -5 0 Re tur n (x) 5 10 15 Standard Dev. = 3 Standard Dev. = 1

Norm al V e rs us Fat Taile d Dis tributions 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 -15 -10 -5 0 Re turn x 5 10 15 Normal Distribution Cauchy Distribution