{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter 08

# Chapter 08 - CHAPTER8 Standalonerisk Portfoliorisk...

This preview shows pages 1–11. Sign up to view the full content.

8-1 CHAPTER 8 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM / SML

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8-2 Investment returns The rate of return on an investment can be  calculated as follows: (Amount received – Amount invested) Return =       ________________________                                                    Amount invested For example, if \$1,000 is invested and \$1,100 is  returned after one year, the rate of return for this  investment is:  (\$1,100 - \$1,000) / \$1,000 = 10%.
8-3 What is investment risk? Two types of investment risk Stand-alone 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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8-4 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 15 0 -70 Firm X Firm Y
8-5 Selected Realized Returns,  1926 – 2004       Average    Standard        Return      Deviation Small-company stocks 17.5% 33.1% Large-company stocks 12.4 20.3 L-T corporate bonds  6.2  8.6 L-T government bonds   5.8  9.3 U.S. Treasury bills  3.8  3.1 Source:  Based on  Stocks, Bonds, Bills, and Inflation:  (Valuation  Edition) 2005 Yearbook  (Chicago:  Ibbotson Associates, 2005), p28.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8-6 Investment alternatives Economy Prob. T-Bill HT Coll USR MP Recession 0.1 5.5% -27.0% 27.0%   6.0% -17.0% Below avg 0.2 5.5% -7.0% 13.0% -14.0% -3.0% Average 0.4 5.5% 15.0% 0.0% 3.0% 10.0% Above  avg 0.2 5.5% 30.0% -11.0% 41.0% 25.0% Boom 0.1 5.5% 45.0% -21.0% 26.0% 38.0%
8-7 Why is the T-bill return independent of  the economy?  Do T-bills promise a  completely risk-free return? T-bills will return the promised 5.5%, regardless  of the economy. No, T-bills do not provide a completely risk-free  return, as they are still exposed to inflation.   Although, very little unexpected inflation is likely  to occur over such a short period of time. T-bills are also risky in terms of reinvestment rate  risk. T-bills are risk-free in the default sense of the  word.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8-8 How do the returns of HT and Coll.  behave in relation to the market? HT – Moves with the economy, and has  a positive correlation.  This is typical. Coll. – Is countercyclical with the  economy, and has a negative  correlation.  This is unusual.
8-9 Calculating the expected return   12.4%     (0.1)   (45%)              (0.2)   (30%)     (0.4)   (15%)           (0.2)   (-7%)     (0.1)   (-27%)     r P   r       r         return   of   rate    expected     r HT ^ N 1 i i i ^ ^ = + + + + = = = =

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8-10 Summary of expected returns      Expected return HT    12.4% Market    10.5% USR     9.8% T-bill     5.5% Coll.     1.0%
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 50

Chapter 08 - CHAPTER8 Standalonerisk Portfoliorisk...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online