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18 download_doc-11.php - B2 I. Introduction a. The larger...

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B2 I. Introduction a. The larger σ r , the less confidence an investor has in their returns i. The more long-run return they will expect to receive b. σ r is not valid for bonds, stocks, projects ect. c. Leveraged stock-fund i. A person or business uses some debt contract to borrow money and then invests the borrowed money in some riskier investment opp. ii. The use of leverage increases both the risk and return of your investment strategy d. Considering individual stocks compared to overall market fund or portfolio and the levered version of the same fund i. The portfolio of stocks (m) gives the same return as stocks on average, but has a lot less volatility ii. The levered portfolio has the same confidence interval as stocks ,but much better long-run return II. Finding a better measure or risk a. Remember σ r is a bad predictor of individual stocks b. β i. The regression slope coefficient ii. A better predictor of fair or required return of individual stocks that σ r iii. Only measures market risk III. What type of risk does β measure a. If a stock has a β of 2.0 then on average that stock will go up 2% whenever something causes the overall market to go up 1% over a given time period b. The stock market is only affected by far reaching or macro news events that surprise investors
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i. Macro news: news that has impact on many firms at one time
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18 download_doc-11.php - B2 I. Introduction a. The larger...

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