05-Risk-returns

# 05-Risk-returns - Risk and Return Stand-alone risk...

This preview shows pages 1–12. Sign up to view the full content.

Risk and Return  1 Risk and Return Stand-alone risk Portfolio risk Risk and return: CAPM/SML Changes in inflation & risk aversion

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

View Full Document
Risk and Return  2 What is investment risk? Investment risk pertains to the probability of earning less than the expected return. The greater the chance of low or negative returns, the riskier the investment.
Risk and Return  3 Probability distribution Expected Rate of Return Rate of return (%) 100 15 0 -70 Firm X Firm Y

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

View Full Document
Risk and Return  4 Investment Alternatives (Table shows returns under different economic states.) Economy Prob. T-Bill HT Coll USR MP Recession 0.1 8.0% -22.0% 28.0% 10.0% -13.0% Below avg. 0.2 8.0 -2.0 14.7 -10.0 1.0 Average 0.4 8.0 20.0 0.0 7.0 15.0 Above avg. 0.2 8.0 35.0 -10.0 45.0 29.0 Boom 0.1 8.0 50.0 -20.0 30.0 43.0 1.0
Risk and Return  5 Why is the T-bill return independent of the economy? T-bills will return the promised 8%, regardless of the state of the economy.

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

View Full Document
Risk and Return  6 Do T-bills promise a completely risk-free return? No T-bills are still exposed to the risk of unexpected inflation. However, not much unexpected inflation is likely to occur over a relatively short period.
Risk and Return  7 Do the returns of High Tech and Collections move with or counter to the economy? HT : With. Positive correlation . Typical. Coll : Countercyclical. Negative correlation . Unusual.

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

View Full Document
Risk and Return  8 R = Σ R i P i Calculate the expected rate of return on each alternative R = Expected rate of return R HT = (-22%)0.10 + (-2%)0.20 + (20%)0.40 + (35%)0.20 + (50%)0.10 = 17.4% . ^ ^ ^ i = 1 n
Risk and Return  9 HT appears to be the best, but is it really? ^ R HT 17.4% Market 15.0 USR 13.8 T-bill 8.0 Coll. 1.7

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

View Full Document
Risk and Return  10 What’s the standard deviation of returns for each alternative? σ σ 2 = variance = - n 1 = i i 2 i P ) R (R = σ = standard deviation
Risk and Return  11 - σ n 1 = i i 2 i P ) R (R = σ T-bills = 0.0%. σ HT = 20.0%. σ

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 46

05-Risk-returns - Risk and Return Stand-alone risk...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online