Chap013 - Chapter 13 Return, Risk, and the Security M arket...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Key Concepts and Skills Know how to calculate expected returns Understand the impact of diversification Understand the systematic risk principle Understand the security market line Understand the risk-return trade-off Be able to use the Capital Asset Pricing Model 13-2
Background image of page 2
Chapter Outline Expected Returns and Variances Portfolios Announcements, Surprises, and Expected Returns Risk: Systematic and Unsystematic Diversification and Portfolio Risk Systematic Risk and Beta The Security Market Line The SML and the Cost of Capital: A Preview 13-3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Expected Returns Expected returns are based on the probabilities of possible outcomes In this context, “expected” means average if the process is repeated many times The “expected” return does not even have to be a possible return = = n i i i R p R E 1 ) ( 13-4
Background image of page 4
Example: Expected Returns Suppose you have predicted the following returns for stocks C and T in three possible states of the economy. What are the expected returns? State Probability C T Boom 0.3 15 25 Normal 0.5 10 20 Recession ??? 2 1 R C = .3(15) + .5(10) + .2(2) = 9.9% R T = .3(25) + .5(20) + .2(1) = 17.7% 13-5
Background image of page 5

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

View Full DocumentRight Arrow Icon
Variance and Standard Deviation Variance and standard deviation measure the volatility of returns Using unequal probabilities for the entire range of possibilities Weighted average of squared deviations = - = n i i i R E R p 1 2 2 )) ( ( σ 13-6
Background image of page 6
Example: Variance and Standard Deviation Consider the previous example. What are the variance and standard deviation for each stock? Stock C σ 2 = .3(15-9.9) 2 + .5(10-9.9) 2 + .2(2-9.9) 2 = 20.29 σ = 4.50% Stock T σ 2 = .3(25-17.7) 2 + .5(20-17.7) 2 + .2(1-17.7) 2 = 74.41 σ = 8.63% 13-7
Background image of page 7

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

View Full DocumentRight Arrow Icon
Another Example Consider the following information: State Probability ABC, Inc. (%) Boom .25 15 Normal .50 8 Slowdown .15 4 Recession .10 -3 What is the expected return? What is the variance? What is the standard deviation? 13-8
Background image of page 8
Portfolios A portfolio is a collection of assets An asset’s risk and return are important in how they affect the risk and return of the portfolio The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets 13-9
Background image of page 9

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

View Full DocumentRight Arrow Icon
Suppose you have $15,000 to invest and you have purchased securities in the following amounts. What are your portfolio weights in each security? $2000 of DCLK
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/06/2011 for the course FSMA 315 taught by Professor Chengruhu during the Spring '11 term at SUNY Canton.

Page1 / 41

Chap013 - Chapter 13 Return, Risk, and the Security M arket...

This preview shows document pages 1 - 11. Sign up to view the full document.

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