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Unformatted text preview: Problem: o Overconfidence of investors Systematic risk and the market portfolio: o CAPM provides measure of individual security risk (not SD) o Market portfolio: Optimally diversified portfolio No unsystematic risk o Systematic vs. unsystematic risk: Systematic risk relates to risk of security related to the market/ external environment Investment has a lot of unsystematic risk: o Low correlation w/ rest of portfolio Measurement of systematic risk: Beta: o The slope of a straight line o On graph of stocks returns and those of a broad market index (like the S&P 500) o Higher beta means higher risk o Formula to calculate an entire portfolios beta o Higher beta, higher risk, higher required rate of return Security market line: o Gives expected return for a stock...
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This note was uploaded on 06/11/2011 for the course BUSI 408 taught by Professor Croce during the Spring '08 term at UNC.
- Spring '08
- Corporate Finance