week 02 Risk Pref &amp; Cap Allocation_6

week 02 Risk Pref &amp; Cap Allocation_6 - Asset Return...

This preview shows pages 1–3. Sign up to view the full content.

Risk and Return Risk Preference, Risk Premium, and Capital Allocation Last Time Course overview Financial assets and markets Cost of trading Margin trading 2/24/2010 FINS5513 2 Short selling Characterizing financial assets: Expected return and risk Others? Characterizing investors: Risk aversion and utility Today Behavioral patterns Capital allocation between risk-free and risky assets 2/24/2010 3 Asset Return Holding period return as a random variable: P E di i \$24 + = = t t t 1 t t 1 P D P r HPR P 2/24/2010 4 t = Ending price = \$24 P t-1 = Beginning price = \$20 D t = Dividend = \$1 r t = ( 24 - 20 + 1 )/ ( 20) = 25% Microsoft Price (RHS) & Adjusted Returns (LHS) 0 50 100 150 200 0 10 20 2/24/2010 5 -200 -150 -100 -50 -20 -10 1/1/1988 12/31/1989 1/1/1992 12/31/1993 1/1/1996 1/1/1998 1/1/2000 1/1/2002 1/1/2004 1/1/2006 1/2/2008 1/1/2010 Microsoft Daily Return Distribution 0 25 0.3 0.35 0.4 2/24/2010 6 0 0.05 0.1 0.15 0.2 0.25 -0.10 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10

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

View Full Document
Return as a Random Variable Probability distribution discrete or continuous Describing probability distributions Location: expected value 2/24/2010 7 Dispersion: variance or standard deviation Symmetry: skewness “Tail” properties: kurtosis Expected Value and Variance Expected value =E(r) = Variance = var(r) = Standard deviation = σ m 1 = k k r × ) k Pr( = σ = m 2 2 k k k 1 Pr(k)[r E(r )] 2/24/2010 8 Given a sample r 1 , r 2 , …, r T , the sample mean and the sample variance are = = T t t 1 1 r r T = = T 2 2 t t 1 1 s [r r] T 1 Covariance and Correlation Covariance Cov(r A ,r B )=E[(r A -E(r A ))(r B -E(r B ))] Sample covariance T 1 2/24/2010 9 Correlation coefficient Note that Cov(r A ,r B )= Cov(r B ,r A ) and Cov(r A ,r A )=Var(r A ).
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern