Unformatted text preview: risk as the overall market systematic A beta < 1 implies the asset has less systematic risk beta than the overall market than A beta > 1 implies the asset has more systematic beta risk than the overall market risk Table 13.8 Table Total versus Systematic Risk Total Consider the following information:
Standard Deviation Standard Beta
1.25 0.95 Security C Security K 20% 30% Which security has more total risk? Which security has more systematic risk? Which security should have the higher expected Which return? return? Example: Portfolio Betas Example: Consider the previous example with the following four Consider securities securities Security DCLK KO INTC KEI Weight Beta .133 .2 .267 .4 2.685 0.195 2.161 2.434 What is the portfolio beta? .133(2.685) + .2(.195) + .267(2.161) + .4(2.434) = .133(2.685) 1.947 1.947 Beta and the Risk Premium Beta Remember that the risk premium = expected Remember return – risk-free rate return The higher the beta, the greater the risk The premium should be premium Can we define the relationship between the risk Can premium and beta so that we can estimate the expected return? expected YES! Example: Portfolio Expected Returns and Betas Returns
30% 25% Expected Return 20% 15% 10% 5% f 0% 0 0.5 1 Beta 1.5 β
A E(RA) R 2 2.5 3 Reward-to-Risk Ratio: Definition and Example an...
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This note was uploaded on 04/13/2010 for the course BUSINESS engl 102 taught by Professor Seyhanözmenek during the Spring '10 term at Middle East Technical University.
- Spring '10