How Does Return and Total Variation Match

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

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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!  
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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.  
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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 ]...
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This note was uploaded on 11/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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

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