519ch11 - major news! 4 Systematic vs. Unsys. Surprises...

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Systematic and Unsystematic Risk What are the sources of Risk? (pp. 297 - 300)
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Chhachhi/519/Ch. 11 2 Actual returns (R) will be : f8e5 R + U (expected + unexpected) Investors form “expectations” about future Expected information is already discounted by the market i.e., the value of the information is already incorporated into the stock prices Attempts to exploit Public information (make large returns) will not be successful
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Chhachhi/519/Ch. 11 3 Surprises Unexpected Returns: caused by surprises Surprises can be GOOD or BAD! Total return (R) = E(R) + U Announcements are news only to the extent they contain “surprise” element “No burglary in BG on Sept. 28” --no news “No burglary in New York on Sept. 28”--
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Unformatted text preview: major news! 4 Systematic vs. Unsys. Surprises Systematic risk: surprises that affect large no. of assets Usually in the same direction I/Rs, Unemployment, Elections, GDP, Unsystematic risk: surprises that affect small no. of assets Some firm-specific news turn into economy-wide events!!! f8e5 R = f8e5 R + U = f8e5 R + m + Chhachhi/519/Ch. 11 5 Risk: Systematic &Unsystematic Systematic Risk; m Nonsystematic Risk; n Total risk; U We can break down the risk, U , of holding a stock into two components: systematic risk and unsystematic risk: risk ic unsystemat the is risk systematic the is where becomes m m R R U R R + + = + =...
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This note was uploaded on 03/21/2010 for the course KNOWLEDGE 5654 taught by Professor Mr.david during the Spring '10 term at IESE Business School.

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519ch11 - major news! 4 Systematic vs. Unsys. Surprises...

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