Chapter_11-Common_Stocks_Analysis_and_Strategy

Chapter_11-Common_Stocks_Analysis_and_Strategy - Common...

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ommon Stocks: Common Stocks: nalysis and Strategy Analysis and Strategy Chapter 11 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University 11-1
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Impact of the Market ervasive and dominant ± Pervasive and dominant ± The single most important risk affecting the price movement of common stocks ¾ Particularly true for a diversified portfolio of stocks ± Accounts for 90% of the variability in a diversified portfolio’s return ± Investors buying foreign stocks face the same situation 11-2
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Required Rate of Return inimum expected rate of return ± Minimum expected rate of return needed to induce investment iven risk, a security must offer some ¾ Given risk, a security must offer some minimum expected return to persuade purchase ¾ Required RoR = RF + Risk premium ¾ Investors expect the risk free rate as well as a risk premium to compensate for the additional risk assumed 11-3
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Security Market Line ML eta 1 0 implies SML E(R) ± Beta = 1.0 implies as risky as market ecurities A and B A B k M ± Securities A and B are more risky than the market C k RF ¾ Beta >1.0 ± Security C is less sky than the 01 . 0 2 . 0 0.5 1.5 Beta M risky than the market ¾ Beta <1.0 11-4 eta 0
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Chapter_11-Common_Stocks_Analysis_and_Strategy - Common...

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