Ch 13 - Ch 13. Return, Risk and Security Market Line (SML)...

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Ch 13. Return, Risk and Security Market Line (SML)
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1. Expected Returns and Variance Until now, we mainly concerned historical returns and risks. However, in this chapter, we will cover returns and variance in future. Without estimating returns and variance in future, we can not make decisions. 1) Expected return = - × = T i i i R E P R E 1 ) ( ) (
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Ex) E(R L ) = 0.6×(-0.2)+0.4×0.7 = 0.16 E(Ru) = 0.6×(0.3)+0.4×0.1 = 0.22 If a risk free rate is 8%, then risk premium is 0.08 and 0.14, respectively. State of Economy Probability Stock L Stock U Recession 0.6 -20% 30% Boon 0.4 70% 10% Sum 1
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2) (Expected) Variance Ex) in the previous example, Var(L) = 0.6*(-0.2-0.16)^2+0.4*(0.7-0.16)^2 = 0.1944 and STDEV(L) = 0.4409. Var(U) = 0.6*(0.3-0.22)^2+0.4*(0.1-0.22)^2 = 0.0096 and STDEV(U) = 0.09798. Which one do you want to buy? 2 1 )] ( ) ( [ ) ( = - - × = T i i i R E R E P R Var
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3) Portfolios: group of stocks, bonds or investments. Portfolio Weight: percentage of total
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This note was uploaded on 02/23/2010 for the course FIN 81341 taught by Professor Yang during the Spring '10 term at CSU San Bernardino.

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Ch 13 - Ch 13. Return, Risk and Security Market Line (SML)...

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