L7- CM and APT - Return and Risk CAPM and APT Reference RWJ...

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Return and Risk : CAPM and APT Reference: RWJ Chp. 11
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Arbitrage Pricing Theory Arbitrage - arises if an investor can construct a zero investment portfolio with a sure profit. Since no investment is required, an investor can create large positions to secure large levels of profit. In efficient markets, profitable arbitrage opportunities will quickly disappear.
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Factor Models: Announcements, Surprises, and Expected Returns The return on any security consists of two parts. First the expected returns Second is the unexpected or risky returns. A way to write the return on a stock in the coming month is: return the of part unexpected the is return the of part expected the is where U R U R R + =
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Factor Models: Announcements, Surprises, and Expected Returns Any announcement can be broken down into two parts, the anticipated or expected part and the surprise or innovation: Announcement = Expected part + Surprise. The expected part of any announcement is part of the information the market uses to form the expectation, R of the return on the stock. The surprise is the news that influences the unanticipated return on the stock, U .
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Risk: Systematic and Unsystematic A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree. An unsystematic risk is a risk that specifically affects a single asset or small group of assets. Unsystematic risk can be diversified away. Examples of systematic risk include uncertainty about general economic conditions, such as GNP, interest rates or inflation. On the other hand, announcements specific to a company, such as a gold mining company striking gold, are examples of unsystematic risk.
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Risk: Systematic and Unsystematic Systematic Risk; m Nonsystematic Risk; ε n σ Total risk; U
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