BMGT440ch1011-CAPM

BMGT440ch1011-CAPM - Return and Risk: The Capital Asset...

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BMGT440– Dr. E F Kiss ch1011- Return and Risk: The Capital Asset Pricing Model (CAPM) Chapter 11 (9 th ed) 10 (7 th th eds)
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BMGT440– Dr. E F Kiss ch1011- Key Concepts and Skills Know how to calculate expected returns Understand the impact of diversification Understand the systematic risk principle Understand the security market line Understand the risk-return trade-off Be able to use the Capital Asset Pricing Model specify how risk aversion influences required rates of return graph diversifiable risk & market risk; explain which of these is relevant to a well-diversified investor state the basic proposition of the CAPM & explain how & why a portfolio’s risk may be reduced Explain the significance of a stock’s beta coefficient, & use the SML to calculate a stock’s required rate of return list changes in the market or within a firm that would cause the required rate of return on the firm’s stock to change Explain how stock price volatility is more likely to imply risk than earnings volatility
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BMGT440– Dr. E F Kiss ch1011- Chapter Outline 1011.1 Individual Securities 1011.2 Expected Return, Variance, and Covariance 1011.3 The Return and Risk for Portfolios 1011.4 The Efficient Set for Two Assets 1011.5 The Efficient Set for Many Securities 1011.6 Diversification: An Example 1011.7 Riskless Borrowing and Lending 1011.8 Market Equilibrium 1011.9 Relationship between Risk and Expected Return (CAPM) 1011.10 Summary and Conclusions We will not cover the entire chapter – we will concentrate on CAPM
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BMGT440– Dr. E F Kiss ch1011- 10.1 Individual Securities The characteristics of individual securities that are of interest are the: § Expected Return § Variance and Standard Deviation § Covariance and Correlation (to another security or index)
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BMGT440– Dr. E F Kiss ch1011- Risk Beta is measurement of how the returns of a particular firm’s stock move relative to changes in the return of the overall movements of stock market CAPM (Capital Asset Pricing Model) specifies relationship between market risk & required rate of return (using concept of Beta & investors’ aversion to risk , as well as risk free rate, which represents return to giving up use of your funds ) SML (Security Market Line) is graphical representation of the relationship Changes in risk aversion (preference) or inflation can change slope of SML or shift curve upward: § slope of SML can change (due to changes in risk aversion/preference) ( slope of SML is Market Risk Premium ) § line can shift upward (due to higher inflation or downward (lower inflation), in response to changes in required rates of return.
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BMGT440– Dr. E F Kiss ch1011- Risk Investment risk is related to probability of actually earning not = expected rate of return
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BMGT440ch1011-CAPM - Return and Risk: The Capital Asset...

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