chap8 - Chapter 8 1 Based on annual returns from 1926-2004...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 8 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Based on annual returns from 1926-2004 Avg. Return Std Dev. Small Stocks 17.5% 33.1% Large Co. Stocks 12.4% 20.3% L-T Corp Bonds 6.2% 8.6% L-T Govt. Bonds 5.8% 9.3% U.S. T-Bills 3.8% 3.1% 2
Background image of page 2
Risk: The Big Picture Expected Return Stand Alone Risk Portfolio Return and Risk Risk Diversification Market Risk Beta CAPM/Security Market Line Equation (SML) 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Risk is an uncertain outcome or chance of an adverse outcome. Concerned with the riskiness of cash flows from financial assets. Stand Alone Risk: Single Asset relevant risk measure is the total risk of expected cash flows or returns measured by standard deviation . 4
Background image of page 4
Portfolio Context: A group of assets. Total risk consists of: Diversifiable Risk (company-specific, unsystematic) Market Risk (non-diversifiable, systematic) Small group of assets with Diversifiable Risk remaining: interested in portfolio standard deviation. correlation ( ρ or r) between asset returns which affects portfolio standard deviation 5
Background image of page 5

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

View Full DocumentRight Arrow Icon
Well-diversified Portfolio Large Portfolio (10-15 assets) eliminates diversifiable risk for the most part. Interested in Market Risk which is the risk that cannot be diversified away. The relevant risk measure is Beta which measures the riskiness of an individual asset in relation to the market portfolio. 6
Background image of page 6
HPR = (End of Period Price - Beginning Price + Dividends)/Beginning Price HPR = Capital Gains Yield + Dividend Yield HPR = (P1-P0)/P0 + D/P0 7
Background image of page 7

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

View Full DocumentRight Arrow Icon
Joe Engine bought Intel for $19.65 per share and has received $0.80 in dividends. What is Joe’s holding period return if the current price is $25 per share? 8
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/14/2011 for the course FIN 221 taught by Professor Dyer during the Spring '09 term at University of Illinois, Urbana Champaign.

Page1 / 34

chap8 - Chapter 8 1 Based on annual returns from 1926-2004...

This preview shows document pages 1 - 9. Sign up to view the full document.

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