Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One)

NOTES

Chapter 1

1. If Outcome 4 is preferred to Outcome 2, then there is a probability q such that a probability of q of getting Outcome 4 and a probability (1 − q) of getting Outcome 1 is exactly as good as Outcome 2 with certainty. Hence:

that is,

Finally, if Outcome 1 is preferred to Outcome 5, then there is an r such that a probability r of Outcome 2 versus (1 − r) of Outcome 5 is exactly as good as certainty of Outcome 1. Hence

that is,