FI.Chapter6 - ry.rer r c Q fY'i Risk Retunm amdthe...

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ry .rer r{ c fY*'i Q'---, Capital Asset Pricing Model Risk, Retunm, amd the kill or luck? That's the questnn llc Wnll Sttut laurnnl s Investment Dartboard Contcst sought b answcr hy comparing rh, a.tu,rl i,,ve{rrnr re-uh- ,'f profe*i,'rr.rl ,)r.,1)\1, dgdrr-t.,nr.,hur- dnd rl.,rl lhros,r. . I Iere . l-,\\ the . onn .r worlFd frr.t, fl, t{drl Shce! Iourlnl (WSD pickcd forrr professional anal)'sts, and each of thosa pros formeci a porifolio b), picking four stocks. The stocks h.,.1 orr.,.jc.r lr\ \Y<f A\41.\. or \.r-.i.r,t: have a market capitnlization of .t least Xj50 rtlrlhon "r.l ,i -lo.L pn,e oi,r, IL'sr $2:.rrrd l\.'ve nver.rE d.ilv I'rd'* .l dl le.r.l 'b'n0.rr' -. Sccond, nnrateurs could enicr ihe contest by L-rr.'ilirg thpu picl ,'t d .rnth .rocl ro th, WS, \ 'hich then pickcd four amntcurs at ran- dom and combined thcir choicljs to makc a four siock portfolio. Third, a group of Ws.l c'di t,'rs form".l .r portLlotrv i-'.'$Int toLrrd.'rts .rr rl,. .rocl l.rbl"-. \r lhe o(qruning ot p.r.h curtesi, thc WS/ announced tho bix resullnrg portfoltus, nnd at tht cnd oi six monihs, the paper announced the fesults. The lop tw'o pros were invitcd back fof the ncxt contest. <in,F I".'0 lh(rc i{\e bpfl 142 compk'r,'i contesis. The pros bo.t the daris 87 times and Iost55 fimcs. The pros nlso beat the Dowjones lndustrial ,^verate h 547' of ihc' contesis. The pro- h.rJ .rn nvern6e .i\-r,,'nrh portr. .lro r.lum ul 10.'i. nr|rilr hr8h, r rl,rn eilh.r th, DTI \ {r\ mon.h.r\, rdt. ',i c.oo ',r rlre {lJrl. retum of only 3.57. . Thc readers, |neartinl€, l.n .rn ,\errdf nf 4', \!r-u. " -.l|r\. penod (30 contests) itain of 7.2'l for the pros. D{r lhe\e r!\Lll\ mc.,n ll,al .lill ir Ino,( rrrp,,rr,rnl lh.rn lu.l when rl ..nrc.lo r'\e,li rd in sk)cks? Not necessarily, according io Brirk)n Malkiel, arl ccononics plofessor at I'rincetor and the alrthor of ihe lr'idely read book, ,{ Rn,t,l,q Wal]. n,'.r.r tv,l/ qrr.1r. cin.( lF( nr '- selcctcd portfolios consisl of rarldonlly chosen "to.l', thev rhulld h.,re .,\L-.rAe r.l Horvever, thc pros havc consistently picked l,'tsh ri-k .1,\ L:. BF. du., rh,rcr\.r-,, 1.,,ll m.r tpr Llunng r1),*l ol lhe r,,rlci ,'n,. srJhl expect high-fisk shcks to outperfonn the aver- age stock. According b Malkiel thc pros' peF formancecouid be due io. risin8 rnarket ralher than superior analyticil skills. Thc WS.l slopped ihat contcst in 2002, so r,{e won'i knor{ ior.,,rL \vherh(r \4dlU.l ,'., . rits\t ,'r wrunts. I hc h 5/ nnN run. ., ruq . onlc-t prllmt cr\ .,mJteLrr. .rd.,Ir. .r -r\ d,rt- In lhe re.f nllv.or)r Pleicd Conicst No. 21, ihc darts trounced r,'d, r-b\ t.llnrn820. \1 r.J.rhcrc.rdL,, (.-, of -1.1% (the Doi{ Joncs Indusrrial Average w.r' .rp 5.1 I. O\crrll. r. .r,ier. ..'r1*t-. 'thiL. ll,e.l.rrl. h.r\e w,'rr I r. lf you hl\rLi hke t,' vnler the.,'rrtp\1. +' vau' sk)ck pick b [email protected]
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201 In ihis chapter, .e start from the basic premise that investors like retums and dis- like Iisk. Therelore, people $'ill invest in riskier assets only if they expect to rcceive higher returns. We.tefhe precisel]r rvhat the term /isl meals as it re]ates to invesiments. We examine procedures manaters use to measue risk, and wc discuss the relationship between risk and retum.In later chapters \^re extend thesc relationships to show how dsk and return interact b detcrminc sccufity prices.
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FI.Chapter6 - ry.rer r c Q fY'i Risk Retunm amdthe...

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