Risk return - handout

Risk return - handout - Risk and Return Return Risk Mind...

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

View Full Document Right Arrow Icon
Risk and Return Return Risk
Background image of page 1

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

View Full DocumentRight Arrow Icon
Mind Map Why?: Analysis of return and the risk required to generate expected returns is basic to most financial decisions. The primary undertaking in this topic is an investigation of how to measure risk. It is only with a prior understanding of risk that evaluation of return is possible.
Background image of page 2
Mind Map Learning objective: Develop an understanding of risk for an individual security and a portfolio Calculate expected return and standard deviation Demonstrate an understanding of diversification and correlation Articulate the difference between systematic risk and total risk Describe the calculation of beta Calculate required return with the CAPM
Background image of page 3

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

View Full DocumentRight Arrow Icon
Mind Map Key words/concepts: Risk as a two-tailed concept Standard deviation Correlation/diversification Systematic vs. firm-specific risk Beta Capital Asset Pricing Model Build-up method
Background image of page 4
In this section, we examine RISK: How to measure risk (variance, standard deviation, beta) How to reduce risk (diversification) How to price risk (security market line, CAPM)
Background image of page 5

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

View Full DocumentRight Arrow Icon
Required rate of return = Risk-free rate of return For a Treasury security, what is the required rate of return? Since Treasury’s are essentially free of default risk , the rate of return on a Treasury security is considered the “risk-free” rate of return.
Background image of page 6
Required Required rate of rate of return return = = Risk-free Risk-free rate of rate of return return + + Risk Risk Premium Premium For a corporate stock or bond , what is the required rate of return? How large of a risk premium should we require to buy a corporate security?
Background image of page 7

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

View Full DocumentRight Arrow Icon
RISK/RETURN Measurement Required Return - the return that an investor requires on an asset given its risk .
Background image of page 8
What is Risk? The possibility that an actual return will differ from our expected return. Uncertainty in the distribution of possible outcomes.
Background image of page 9

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

View Full DocumentRight Arrow Icon
What is Risk? What is Risk? Uncertainty in the distribution of possible outcomes. 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 -10 -5 0 5 10 15 20 25 30 Company B return 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 4 8 12 Company A return
Background image of page 10
How do we Measure Risk? The standard approach is to examine the
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 46

Risk return - handout - Risk and Return Return Risk Mind...

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

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