Chapter 8 Notes

# Chapter 8 Notes - Chapter 8: Risk and Rates of R.eturn...

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Chapter 8: Risk and Rates of R.eturn (213) Assignments: ^, ST-4 , ST-5 (only b , e and f) on page 344 b. #8-10, 11,23 on page345-350 dueon Tuesday (1012712008) 4. Portfolio return and Portfolio risk The definition of portfolio is a collection of securities (such as stocks or bonds). The purpose of understanding portfolio returns and portfolio risk is two fold: (1) You need to know how to compute portfolio returns and portfolio risk per se. (2) You can understand the effects of diversification only after understanding portfolio returns and risk. Example 1 weight ur =0'5 wz=o'5 Portfolio I Year rt (%) /2 rp=wlrl+w2r2 2001 40 28 3{ :0,5*10+0.5*28 2002 -10 20 5 2003 35 41 -18 2004 -5 t7 ll 2005 t5 J I Expected return t5 l5 l5:0.5*15 + 0.5o15 Total risk 22.61 20.6J= /o+-sl' * ts - rsy * 1:a- rry <-t I r5); + (e- l5)' ! 5-l CV 1.51 1.50 r.38

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(4) Compute the expected return, total risk, and CV of portfolio 2 and 3. weight wr =0'5 wz=o'5 Portfolio 2 Year rt \$) 12 rp =Wtrl*Wrr2 f/o) 2001 40 -t0 I5 2002 -10 40 t: 2003 35 -5 l5 2004 -5 35 r5 2005 l5 l5 l5 Expected return, i, l5 t5 l5 Total risk (o,) 22.64 22.61 0 CV 0 weight wr =0'5 wz:O'5 Portfolio 3 Year \ (%) 12 rp:wtrl+w2r2 (Vo) 2001 40 40 1G 2002 -10 -10 -10 2003 35 35 35 2004 -5 -5 -f, 2005 l5 r5 15 Expected return 15 l5 l5 Total risk 22.61 22.61 22.64 CV 1.51
5. Diversification

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## This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State University .

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Chapter 8 Notes - Chapter 8: Risk and Rates of R.eturn...

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