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Lecture_08_student - Lecture 8: Risk and Return Topics...

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Lecture 8: Risk and Return
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Topics Return concepts Risk concepts Stand-alone risk Portfolio (market) risk Risk and return: CAPM/SML Discounted Cash Flows Annuity and Perpetuity
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What are investment Returns? Investment returns measure the financial results of an investment. Returns may be historical or prospective (expected). Returns can be expressed in: Dollar terms. Percentage terms.
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Dollar Return versus Percentage Return An investment costs $1,000 and is sold after 1 year for $1,100. Dollar return: Percentage return: $ Received  -  $ Invested     $1,100      -   $1,000       = $100. $ Return/$ Invested       $100/$1,000        = 0.10 = 10%.
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What is investment risk? Typically, investment returns are not known with certainty. Investment risk pertains to the probability of earning a return less than that expected. The greater the chance of a return far below the expected return, the greater the risk.
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Which stock is riskier? -30 -15 0 15 30 45 60 Returns (% ) Stock A Stock B
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Risk and Return According to estimates of Ibbotson Associates, the median expected return for department stores (e.g. Sears, Kohls) in 2007 is 11.63 percent, whereas computer service companies (e.g. Microsoft, Oracle) have a median expected return of 15.46 percent. Air
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Lecture_08_student - Lecture 8: Risk and Return Topics...

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