Day 23-Ch 8 Part 2-11.28.11

# Day 23-Ch 8 Part 2-11.28.11 - Day23...

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Business Management 201 Day 23 Chapter 8—Part 2: Risk and Return November 28, 2011

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Day 23 Agenda (November 28) by 5:00 PM—Turn them in during class  or to a box in 640 TNRB 2) Reading Quiz Chapter 9 Due Wed, Nov 30 at 8:00 AM  3) PM 4) Verify Quizzes on Blackboard—Ch 11 Checkmark 5) Deadline for Late Work—Wednesday, Dec 7 at 11:59  PM 6) Regular TA Review Sessions this Week 7) Final Exam Review Material Posted by This Weekend 8) Chapter 8—Part 2: Risk and Return
Chapter 8: Chapter 8: Risk & Return

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Risk and Return Risk and Return Return Return Risk Risk
Three Evaluations of RISK: 1) How to Measure  Risk      (variance, standard deviation,  beta) 2) How to Reduce  Risk     (diversification) 3) How to Price  Risk     (security market line, CAPM)

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Expected Return ( k ) Recap State of      Probability                   Return Economy         (P)                 Utility           Hi-Tech Recession        0.20                   4%                -10% Normal            0.50                  10%                14% Boom               0.30                  14%                30% k  =  P(k 1 )*k 1  + P(k 2 )*k 2  + . ..+ P(k n )*k n
n i = 1 =             (k i  - k) 2  * P i    σ σ Σ Σ Step 1:   Solve for each individual variance from the  mean expected return ( k ).  Add each individual  variance together for the  Total Variance . Step 2:   Solve for  Standard Deviation Take the  square root of the total variance  σ =   Total Variance.

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n i = 1 =             (k i  - k) 2  * P i    σ σ Σ Σ Utility Inc  Step 1:  Solve for Total Variance:  (4% -  10%) 2    * (.2) =    7.2 (10% - 10%) 2   * (.5) =    0.0 (14% - 10%) 2   * (.3)  =    4.8 Total Variance    =   12.0 Step 2:  Solve for Standard Deviation: Standard Deviation =    12  =  3.46%
n i = 1 =             (k i  - k) 2  * P i    σ σ Σ Σ Hi-Tech Inc  Step 1:  Solve for Total Variance:  (-10% - 14%) 2   * (.2)  =  115.2 (14%   - 14%) 2   * (.5)  =      0.0 (30%  - 14%) 2   * (.3)   =    76.8 Total Variance    =    192.0 Step 2:  Solve for Standard Deviation: Standard Deviation =    192  =    13.86%

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Statistic           Utility    Hi-Tech Expected Return               10%                14% Standard Deviation        3.46%          13.86% Which stock would you prefer? How would you decide?
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Day 23-Ch 8 Part 2-11.28.11 - Day23...

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