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im-06-4e - CHAPTER SIX RISK AND RETURN PAST AND PROLOGUE...

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CHAPTER SIX RISK AND RETURN: PAST AND PROLOGUE CHAPTER OVERVIEW This chapter introduces the concept of risk and return. That is, the student is exposed to the idea that rational investors potentially will accept more risk if the expected returns of the investment are commensurably higher. The student is also alerted to the fact that investors differ as to the degree of risk they are willing to accept. The concepts of producing portfolios of acceptable risk/return trade-offs for various investors are developed by combining risk free assets (U. S. Treasury bills or money market mutual funds) with risky mutual fund portfolios. The chapter also includes historical risk/return data for different types of financial assets and presents statistical calculations of risk and return measures, both ex post and ex ante. LEARNING OBJECTIVES After covering this chapter, the student should be able to calculate risk and return statistical measures, such as holding period returns, average returns, expected returns, and standard deviations, ex post and ex ante. In addition, the student should be able to construct portfolios of different risk levels, given information about risk free rates and returns on risky assets. The student should be able to calculate the expected return and standard deviation of these portfolios. After performing the above calculations, the student should begin to realize that higher returns are possible, but that increased risk must be assumed, that theoretically one can relatively easily construct portfolios of varying degrees of risk by simply altering the composition of the portfolio between risk free securities and mutual funds.
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