Formulass - return from the expected return Total risk of...

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Formulas Chapter 6 (Photocopies) Lecture 9 Risks Holding-Period Dollar Gain (or Dollar Gain)= Price End of Period + Dividend + Price Beginning Period Holding-Period Rate of Return= Dollar Gain Price Beginning of Period Expected Cash flow ( X ) = Σ Pbi * Cfi ▫ Where Pbi = probabilities of outcome i CFi = cash flows in outcome i Expected Return (%) = Σ Pbi * ri ▫ Where Pi = probabilities of outcome i ki = expected % return in outcome i Monthly Holding Return=
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Portfolio Beta: bportfolio= Σ wj *b j Where wj = % invested in stock j b i = Beta of stock j Investor Required Rate of Return= Risk Defined • Risk refers to potential variability in future cash flows. • The wider the range of possible future events that can occur, the greater the risk. • The returns on common stock is more risky than returns from investing in savings account in a bank. Standard Deviation: square root of the weighted average squared deviation of each possible
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Unformatted text preview: return from the expected return. Total risk of Portfolio is due to two types of Risk: ▫ Systematic (or Market risk) is risk that affects all firms (ex. Tax rate changes, war) ▫ Unsystematic or company unique risk(ex. Labor strikes, CEO change) ▫ If two stocks are perfectly positively correlated, diversification has no effect on risk. ▫ If two stocks are perfectly negatively correlated, the portfolio is perfectly diversified. • Beta is the risk that remains for a company even after we have diversified our portfolio. ▫ A stock with a Beta of 0 has no systematic risk ▫ A stock with a Beta of 1 has systematic risk equal to the “typical” stock in the marketplace ▫ A stock with a Beta exceeding 1 has systematic risk greater than the “typical” stock...
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Formulass - return from the expected return Total risk of...

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