2.6 Stud%20Week%209%20%20Lecture%202%20Risk%20and%20Return.ppt

2.6 Stud%20Week%209%20%20Lecture%202%20Risk%20and%20Return.ppt

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Unformatted text preview: Risk and Return: Portfolios and Diversification Week 9 Lecture 2 Topics Covered Measuring Risk Risk & Diversification Thinking About Risk Risk-averse investors require higher rates of return to invest in higher-risk 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 stand-alone 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 15-10 Stock W Stock M-10 Portfolio WM Returns distribution for two perfectly positively correlated stocks ( = 1.0) Stock M 15 25-10 Stock M 15 25-10 Portfolio MM 15 25-10 Portfolio construction: Risk and return Assume a two-stock 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...
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2.6 Stud%20Week%209%20%20Lecture%202%20Risk%20and%20Return.ppt

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