Risk level of an investor is determined by degree to which investors are willing to commit funds
Risk aversion is how reluctant you are in investing.
If T-Bill denotes the risk-free rate, rf, and variance denotes volatility of returns then:
The risk premium of a portfolio is: E(rp) - rf
In other words, expected return of portfolio minus risk-free rate.
To quantify the degree of risk aversion with parameter A:
The Sharpe (Reward-to-Volatility) Measure
This sharpe ratio is known to be used by mutual/hedge fund managers. This shows how much extra/additional return (excessive return or premium) you are earning when you bear a unit of risk in an investment. The Sharpe ratio has as its principal advantage that it is directly computable from any observed series of returns without need for additional information surrounding the source of profitability.
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