CH-13 - GSB 531 Managerial Finance Chapter 13 Return, Risk,...

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1 GSB 531 Managerial Finance Chapter 13 Return, Risk, and the Security Market Line Risk and Return • There is a reward for bearing risk. • The higher the risk you bear, the higher the reward • Risk: Systematic and Unsystematic • Systematic: affect almost all stocks • Unsystematic: affect only a few • To a diversified investor, only systematic risk matters. • How risk and return relate: SML and beta Expected Returns What is the expected returns on Stock L and on Stock U ??? U: 20% , L: 25%
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2 Risk Premium • Risk Premium: the difference between the expected return on a risky investment and the certain return on a risk-free investment. • Risk Premium = Expected return – Risk-free rate = E (R) – R f Expected Returns Variances of the Returns Expected returns are 25% on L and 20% on U. Variances are .2025 on L and 0.01 on U. Standard Deviations ??? With 80% chance of recession, expected returns are 2% on L and 26% on U. Variances are .1296 on L and 0.0064 on U. Standard Deviations ???
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3 Portfolios • Investors usually hold more than one asset. • Portfolio: a group of assets, such as stocks and bonds, held by an investor. • Portfolio weights: a portfolio of $200, with
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This note was uploaded on 11/30/2011 for the course GSB 531 taught by Professor Bing during the Spring '11 term at Cal Poly.

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CH-13 - GSB 531 Managerial Finance Chapter 13 Return, Risk,...

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