Chapter 5 - • standard deviation square rot of the...

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Chapter 5 Understanding Risk I. Defining risk a. A measure of the uncertainty about the future payoff to an investment, measured over some time horizon and relative to a benchmark b. Benchmark- performance of a group of experienced investment advisors or money managers II. Measuring risk a. Possibilities, probabilities, and expected value Payoff- amount you could get back from the investment Expected value- average, most likely outcome b. measure of risk variance- average of the squared deviations of the possible outcomes from their expected value
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Unformatted text preview: • standard deviation- square rot of the variance • value at risk III. Risk aversion, the risk premium, and the risk-return trade-off a. Risk premium- the riskier and investment the higher the risk premium b. Trade-off between risk and expected return IV.Sources of risk: idiosyncratic and systematic risk a. Idiosyncratic risk affects specific firms, not everyone b. Systematic risk affects everyone V. Reducing Risk through Diversification a. Hedging risk b. Spreading risk...
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