Chapter 17 lecture slides

Chapter 17 lecture slides - Chapter 17 Measuring a...

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Chapter 17 Measuring a Portfolio’s Risk Profile David S. Krause, Marquette University FINA 4065
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Portfolio Risk Profile Standard deviation and variance are common measures of the variability of returns Standard deviation is used as a more understandable measure of the degree of dispersion It is assumed that the underlying probability distribution is normal distribution – the distribution is symmetric around the expected (average) value To apply normal distribution, it is necessary to assess whether a historical distribution is normally distributed
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Portfolio Risk Profile Bond returns: Lower limit on the loss: reflecting how high interest rates can rise Treasury rates have never exceeded 15% Maximum return: maximum price of the bond is the undiscounted value of the cash flows, assuming that negative interest rates are not possible.
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Portfolio Risk Profile Downside risk measures – the focus is only on that portion of the investment’s return distribution that is below a specified level. For downside risk measures, portfolio managers define target returns, and returns less than the target represent adverse consequences. The three more popular downside risk measures are: - Target semivariance - Shortfall probability - Value at risk
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Portfolio Risk Profile Downside risk measures Target semivariance – measure of the dispersion of the outcomes below the target return. This measure is not used in bond portfolio management extensively because of ambiguity, poor statistical understanding, and difficulty of forecasting.
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Downside risk measures Shortfall risk – the probability that an outcome will have a value less than a target return. The measure fails to consider the magnitude of the losses below the target return. This measure also has the problems of the target
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This note was uploaded on 03/19/2011 for the course ACCT 440 taught by Professor Smith during the Spring '11 term at Saginaw Valley.

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Chapter 17 lecture slides - Chapter 17 Measuring a...

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