Team Week 4 Paper - Risk and Return Analysis Risk and...

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Risk and Return Analysis Risk and Return Analysis Paper FIN/402
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Risk and Return Analysis Risk and Return The Sharpe Ratio, according to Bodie, Kane & Marcus (2008) describes the “reward-to- volatility ratio” indicating the reward per unit of risk. The Sharpe ratio represents how much excess return on his receiving from the extra volatility present. The Sharpe ratio is a very quickly comprehend the way to measure risk versus reward in a portfolio. The Sharpe ratio is a risk- adjusted measure of return that is used to validate the performance of the portfolio. One can use the Sharpe ratio in comparison and contrast with other portfolios in order to determine the acceptable level of risk and to match up a portfolio with an investors risk appetite. A risk and return analysis is used to determine the proportion of a portfolios composition and the likelihood of that portfolio meeting investor objectives. This process involves analyzing the underlying securities, documenting the securities level of risk (beta), expected value, and the overall portfolio’s risk tolerance. This allows an investor to adjust the securities within the portfolio to its most efficient frontier, thus producing the highest returns for each level of risk. The beta value will provide an understanding of the volatility of each stock selected and allow a portfolio to be built with a minimum variance of volatility as well as risk. Beta The beta of a portfolio is the weighted sum of the individual asset betas (Wikipedia, 2011). The Beta of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole. Beta incorporates the correlation of returns between the security and the market. In addition, beta is a key component to the capital asset pricing model (CAPM), which represents the discount rate investors use to determine the present value of a company or firms future cash Beta measures the part of the asset's statistical variance that cannot
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Risk and Return Analysis be removed by diversification. The beta allows investors to assess a portfolio of securities and is a measure of the systematic risk of the security (Wikipedia, 2011). An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average. If the beta is greater than one, this would indicate the stock is more volatile than the market, whereas if the beta is less than one, meaning the stock is less volatile (Investopedia, 2011). Beta’s values are tied to the volatility of the market. If a security’s price is more volatile than the market, the beta value will be greater. If the movement is less than those of the market,
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Team Week 4 Paper - Risk and Return Analysis Risk and...

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