This preview shows pages 1–11. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Risk and Return: Portfolios and Diversification Week 9 Lecture 2 Topics Covered Measuring Risk Risk & Diversification Thinking About Risk Riskaverse investors require higher rates of return to invest in higherrisk securities Risk Aversion General comments about risk 35% for an average stock. Most stocks are positively (though not perfectly) correlated with the market (i.e., between 0 and 1). Combining stocks in a portfolio generally lowers risk. Risk and Diversification Diversification  Strategy designed to reduce risk by ______________ across many investments. Unique Risk  Risk factors affecting ________. Also called diversifiable risk or standalone risk. _____________ through diversification. Market Risk  ___________ sources of risk that affect the __________ market. Also called systematic risk. ________ be eliminated . Returns distribution for two perfectly negatively correlated stocks ( = 1.0)10 15 15 25 25 25 1510 Stock W Stock M10 Portfolio WM Returns distribution for two perfectly positively correlated stocks ( = 1.0) Stock M 15 2510 Stock M 15 2510 Portfolio MM 15 2510 Portfolio construction: Risk and return Assume a twostock portfolio is created with $50,000 invested in both HT and Collections. A portfolios expected return is a weighted average of the returns of the portfolios component assets. Standard deviation is a little more tricky and requires that a new probability distribution for the portfolio returns be devised. Calculating portfolio expected return ^ p N ^ ^ p i i i 1 ^ p r is a weighted average: r w r r 6.7% = = = = An alternative method for determining portfolio...
View Full
Document
 Spring '09
 DebraK.Reed

Click to edit the document details