7 - Chapter 13: Return, Risk and the Security Market Line...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
Faculty of Business and Economics University of Hong Kong Dr. T. Lin Chapter 13: Return, Risk and the Security Market Line
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Chapter 12 Sample portfolios Measurement Facts and Evidence Efficient Market Hypothesis Return Risk Chapter13 Population Individual stocks and portfolio stocks Measurement Diversification SML/CAPM
Background image of page 2
Basic Probability 3 Expected Return Variance and standard deviation Covariance and correlation
Background image of page 3

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

View Full DocumentRight Arrow Icon
An Example 4 Stock A and B have the following probability distribution of possible outcomes: Probability Return on A Return on B 0.30 10% 35% 0.50 14% 20% 0.20 20% 10%
Background image of page 4
Expected Return 5 Expected Return for A: Similarly the expected return for B is 22.5%. 3 1 0.30(10%) 0.50(14%) 0.20(20%) 14.00% A n n n px
Background image of page 5

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

View Full DocumentRight Arrow Icon
Expected versus Unexpected Returns 6 Realized returns are generally not equal to expected returns There is the expected component and the unexpected component At any point in time, the unexpected return can be either positive or negative Over time, the average of the unexpected component is zero
Background image of page 6
Variance and Standard Deviation 7 The variance of stock A: The standard deviation is     2 2 1 2 22 0.30(.1 .14) 0.50 .14 .14 0.20(.20 .14) .12% N A n n A n px         2 .12% 3.46% AA    
Background image of page 7

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

View Full DocumentRight Arrow Icon
Covariance 8 The covariance of A and B is:    1 0.30(.1 .14)(.35 .225) 0.50(.14 .14)(.2 .225) 0.20(.2 .14)(.1 .225) .3% AB N n n A n B n p x y 
Background image of page 8
Correlation Coefficient 9 The correlation coefficient between A and B is:    .3% 3.46% 9.01% 0.96 AB AB AB  
Background image of page 9

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

View Full DocumentRight Arrow Icon
Summary Results for A and B 10 A B Mean Standard Deviation 14.00% 3.46% 22.50% 9.01% Correlation Coefficient -0.96
Background image of page 10
Portfolio Mean and Variance 11 A Portfolio is a combination of two or more stocks. Suppose that you have $100 and invest $20 in stock A and the remaining $80 in stock B, what are the portfolio expected return and variance?
Background image of page 11

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

View Full DocumentRight Arrow Icon
Portfolio Mean 12 Portfolio weights: Stock A: W A = 20% Stock B: W B = 80% Portfolio expected return:       20% 14% 80% 22.5% 20.8% P A A B B ww 
Background image of page 12
Portfolio Variance and Standard Deviation 13 Portfolio Variance Portfolio standard deviation         2 2 2 2 2 22 2 20% .12% 80% .81% 2 20% 80% .3% 0.43% P A A B B A B AB w w w w  2 .43 6.55% pp    
Background image of page 13

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

View Full DocumentRight Arrow Icon
Portfolio Expected Return & Risk 14 Expected Return Risk
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/11/2011 for the course BUSI 1003 taught by Professor Cyc during the Spring '11 term at HKU.

Page1 / 43

7 - Chapter 13: Return, Risk and the Security Market Line...

This preview shows document pages 1 - 15. Sign up to view the full document.

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