Risk, Return, and Security Market Line

Risk, Return, and Security Market Line -...

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    Risk, Return, and Security  Market Line Financial Management
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    Outline Risk of an investment Expected return of an investment Portfolios: Portfolio expected returns Portfolio risk Risk: Systematic and Unsystematic Risk Diversification and Portfolio Risk The security market line and Capital Asset  Pricing Model
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    Defining Risk Risk refers to the chance that some  unfavorable event will happen Investment risk is the probability that actual  returns may deviate from expected returns The chance that actual returns may be lower  than expected return gives rise to investment  risk Higher the probability of actual returns being  less than expected, higher will be investment  risk
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    Returns Actual Return Realized return/historical return/return ex-post Expected Return Return ex-ante/anticipated return A weighted average of all possible returns, where  weights represent probability of each possible  outcome Multiply each possible outcome with its probability  and add them up over all possible outcomes
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    Measuring Expected Return E(r) = P 1  r 1  + P 2 r 2  + … + P n r n               n
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Risk, Return, and Security Market Line -...

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