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Unformatted text preview: Risk and Rates of Return Chapter 8 StandAlone Risk Portfolio Risk Risk and Return: CAPM/SML 81 Investment Returns The rate of return on an investment can be calculated as follows: 82 ( 29 Cost Cost value ending Expected Return = What is investment risk? Two types of investment risk Standalone risk Portfolio risk Investment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns, the riskier the investment. 83 Probability Distributions A listing of all possible outcomes, and the probability of each occurrence. Can be shown graphically. Expected Rate of Return Rate of Return (%) 100 1570 Firm X Firm Y 84 Calculating Standard Deviation = = = = = N 1 i i 2 2 P ) r r ( Variance deviation Standard 85 Coefficient of Variation (CV) 86 A standardized measure of dispersion about the expected value, that shows the risk per unit of return....
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 Spring '10
 JaimeLancaster
 Finance

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