Topic Five - Risk and Return

Topic Five - Risk and Return - Topic 5 Risk and Return...

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Topic 5 Risk and Return Craig Mellare University of Sydney
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Government Bond (risk free - completely certain payoff): $105 |____________________| 0 1 Price = $100 r= 5% Assume the Following Opportunity:
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What is the value of the following riskless asset? $105 |____________________| 0 1 since r = 5% => Price = $100 But what if future payoff was risky? lower price = higher r How Would You Price the following?
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Hence: risky required return = risk free rate% + risk premium% note also that: risk premium% = risky required return% - risk free rate% This lecture and the next are devoted to building a model of the risk premium! Interpretation of Risky Discount Rates
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1. Quantify total returns for selected Australian Securities 2. Definition and measurement of total risk for (i) individual securities (ii) portfolios of securities 3. Demonstrate how portfolios reduce risk 4. Essentially do the groundwork for developing a model of a risk premium known as the CAPM Lecture Outline
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10 Year Treasury Bonds [Commonwealth Bonds] i. coupon bonds ii. semi-annual interest payments iii. riskless except for interest rate/inflation risk The Australian Market - Securities
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13 week Treasury Notes: i. 90 day maturity ii. zero coupon securities iii. riskless except for inflation risk The Australian Market - Securities
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S&P/ASX200 [replaced All Ordinaries Index as most popular] i. measures of common stock price movements ii. based on approximately 200 biggest stocks iii. common stock investors share firm risks iv. Updating formula: I t = I t-1 x (Market Cap t /Market Cap t-1 ) The Australian Market - Securities
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Same as ASX200 except includes dividends in calculations Updating formula: AI t = AI t-1 x (Market Cap t +Div t )/Market Cap t-1 The Australian Market - Securities
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Dividend Yield of Stocks in the All Ords 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 mean = 4%
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(Table 6.2)
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This note was uploaded on 08/22/2011 for the course FINC 2011 taught by Professor Craigmellare during the Three '10 term at University of Sydney.

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Topic Five - Risk and Return - Topic 5 Risk and Return...

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