How Much Is an Investor's Tolerance for Risk Worth Over

question 21

Essay

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks. Assume the historic real returns of 2.1% annually for bonds and 9.3% for common stocks.

Analyze different scenarios using the criterion of expected monetary value (EMV) to make informed decisions.

Understand and apply various decision-making strategies such as maximax, maximin, and equally likely in different contexts.

Comprehend the structure and utility of decision tables in organizing and analyzing decision alternatives.

Understand the definition and elements of a decision tree, including its branches, nodes, and the representation of choices and outcomes.

---

Definitions:

Market Rates

are the prevailing interest rates or prices for services, securities, or commodities in the open market.

Premium

The amount paid for an insurance policy or the amount by which a bond or stock sells above its face value.

Par

Par value, often referred to simply as "par," is the face value of a bond or the stock value stated in the corporate charter, not necessarily its market value.

Bond Prices

The amount of money for which bonds are bought and sold in the market, influenced by factors such as interest rates, supply, and demand.