Capital Asset Pricing Mode1

Capital Asset Pricing Mode1 - can increase or decrease...

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Capital Asset Pricing Model From Last Time The risk of holding an asset is that the actual returns may differ from the expected returns. Standard deviation measures dispersion around the mean. A low standard deviation means that all the possible returns are right around the mean, so there is little risk that the actual return will be much different than the expected return. When the standard deviation is high, there is a lot of variability in the possible returns. Many of them are far from the mean. So, there is more risk that the actual return will be much different than the expected return. Types of Risk Diversification reduces risk. There are two types of risk: 1. market or systematic risk - common to all assets of a certain type, e.g. the business cycle
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Unformatted text preview: can increase or decrease returns on stocks collectively 2. idiosyncratic or unsystematic risk - a unique risk that assets carry that does not affect the market as a whole, e.g. the price of Microsoft stock is affected by the government's anti-trust lawsuit Diversification can eliminate idiosyncratic risk but not systematic risk. Adding stocks to a portfolio reduces the variability of the portfolio's return by reducing the idiosyncratic risk. The average annual variability of the entire portfolio of stocks on the NYSE is 19.2%. This represents the risk that cannot be reduced through diversification. It is the market or systematic risk....
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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Capital Asset Pricing Mode1 - can increase or decrease...

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