An understanding of risk and how to deal with it is an essential part of modern economics. Whether liability litigation for pharmaceutical firms or an individual's having insufficient wealth to retire, risk is something that can be recognized, quantified, analyzed, treated--and incorporated into our decision-making processes. This book represents a concise summary of basic multiperiod decision-making under risk. Its detailed coverage of a broad range of topics is ideally suited for use in advanced undergraduate and introductory graduate courses either as a self-contained text, or the introductory chapters combined with a selection of later chapters can represent core reading in courses on macroeconomics, insurance, portfolio choice, or asset pricing. The authors start with the fundamentals of risk measurement and risk aversion. They then apply these concepts to insurance decisions and portfolio choice in a one-period model. After examining these decisions in their one-period setting, they devote most of the book to a multiperiod context, which adds the long-term perspective most risk management analyses require. Each chapter concludes with a discussion of the relevant literature and a set of problems. The book presents a thoroughly accessible introduction to risk, bridging the gap between the traditionally separate economics and finance literatures
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Cover -- Title -- Copyright -- Contents -- Preface -- I. Decision Theory -- 1 Risk Aversion -- 1.1 An Historical Perspective on Risk Aversion -- 1.2 Definition and Characterization of Risk Aversion -- 1.3 Risk Premium and Certainty Equivalent -- 1.4 Degree of Risk Aversion -- 1.5 Decreasing Absolute Risk Aversion and Prudence -- 1.6 Relative Risk Aversion -- 1.7 Some Classical Utility Functions -- 1.8 Bibliographical References, Extensions and Exercises -- 2 The Measures of Risk -- 2.1 Increases in Risk -- 2.2 Aversion to Downside Risk -- 2.3 First-Degree Stochastic Dominance -- 2.4 Bibliographical References, Extensions and Exercises -- II. Risk Management -- 3 Insurance Decisions -- 3.1 Optimal Insurance: an Illustration -- 3.2 Optimal Coinsurance -- 3.3 Comparative Statics in the Coinsurance Problem -- 3.4 The Optimality of Deductible Insurance -- 3.5 Bibliographical References, Extensions and Exercises -- 4 Static Portfolio Choices -- 4.1 The One-Risky-One-Riskfree-Asset Model -- 4.2 The Effect of Background Risk -- 4.3 Portfolios of Risky Assets -- 4.4 Bibliographical References, Extensions and Exercises -- 5 Static Portfolio Choices in an Arrow-Debreu Economy -- 5.1 Arrow-Debreu Securities and Arbitrage Pricing -- 5.2 Optimal Portfolios of Arrow-Debreu Securities -- 5.3 A Simple Graphical Illustration -- 5.4 Bibliographical References, Extensions and Exercises -- 6 Consumption and Saving -- 6.1 Consumption and Saving under Certainty -- 6.2 Uncertainty and Precautionary Savings -- 6.3 Risky Savings and Precautionary Demand -- 6.4 Time Consistency -- 6.5 Bibliographical References, Extensions and Exercises -- 7 Dynamic Portfolio Management -- 7.1 Backward Induction -- 7.2 The Dynamic Investment Problem -- 7.3 Time Diversification -- 7.4 Portfolio Management with Predictable Returns -- 7.5 Learning about the Distribution of Excess Returns.
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