How Does Return and Total Variation Match

How Does Return and Total Variation Match - Specifically it...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
How Does Return and Total Variation  Match? Suppose we randomly selected and then  ranked 4 stocks by return (A, B, C, and  D).  What would the risk/return  relationship tell us? What is the  Mystery # component? Security        E    (return)       Std. Dev    Mystery#?     A       8%   13% ? B 12%   9% ? C 15%   22% ? D 19%     11% ? The market compensates investors for  accepting risk— but  only  for market  risk! Firm-specific risk  can  and  should  be  diversified away!  
Image of page 1

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

View Full Document Right Arrow Icon
That’s the mystery element—how  much market risk does a security  have? We need to be able to measure  market risk .    * Mystery Element This is why we  have BETA—the  MYSTERY  ELEMENT.” * Beta Beta:   a measure of market risk.  
Image of page 2
Image of page 3

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

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Specifically, it is a measure of how an individual stock’s returns vary with market returns. Think of it as a measure of the “sensitivity” of an individual stock’s returns to changes in the market. Three Potential Beta Scenarios : Scenario 1 : A firm that has a beta = 1 has average market risk. The stock is no more or less volatile than the market. Scenario 2 : A firm with a beta < 1 is less volatile than the market. [ Example: utilities] Scenario 3 : A firm with a beta > 1 is more volatile than the market. [ Example: tech firms ]...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern