091010_Portfolio theory - Portfolio theory Risk and return...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Portfolio theory
Background image of page 1

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

View Full DocumentRight Arrow Icon
Risk and return z Investors generally require a premium for bearing additional risk z What is the measure of risk? z What should be the compensation for each additional unit of risk? z Do different investors require different compensations for additional unit of risk? (Preferences)
Background image of page 2
Risk and return characteristics: single security z The actual return of a security is uncertain => instead we use expected returns as a measure of profitability z Returns and their probabilities are unknown => could use historical returns as proxies z The standard deviation is a measure of the risk of a security ( ) n n R p R p R p R E + + + = ... 2 2 1 1 () () ( ) () ( ) () 2 2 2 2 2 1 1 ... n n n R E R p R E R p R E R p + + + = σ
Background image of page 3

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

View Full DocumentRight Arrow Icon
Probability distribution: historical returns z A typical distribution of historical returns: normal distribution
Background image of page 4
Empirical evidence: normal distribution 0 200 400 600 800 1000 1200 1400 1600 -0,12 -0,08 -0,04 0,00 0,04 0,08 0,12 0,16 0,20 Chevron Corp. historical returns pdf 0 200 400 600 800 1000 1200 1400 -0,16 -0,11 -0,06 -0,01 0,04 0,09 0,14 0,19 Microsoft Corp. historical returns pdf E(R Chevron ) = 0,04% St. dev. = 1,5% E(R Microsoft ) = 0,1% St. dev. = 2,2%
Background image of page 5

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

View Full DocumentRight Arrow Icon
z Portfolio – is a collection of different assets held by a given investor z Suppose you have $1000 and you purchase a number of assets: $500: stocks of Gazprom
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 23

091010_Portfolio theory - Portfolio theory Risk and return...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online