09_18_09 Ch8 Risk

09_18_09 Ch8 Risk - Chapter8Outline:RateandRatesofReturn

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Chapter 8 Outline: Rate and Rates of Return All business assets are expected to produce cash flows, and the riskiness of an  asset is based on the riskiness of its cash flows A stock that has a great deal of risk held by itself may be much less risky when  held as part of a lager portfolio Portfolio context risk o Diversifiable risk o Market risk – relevant to rational investors P/E Ration dependent on o Fundamental factors (interest rates/earnings growth rate) o Reflects investors optimism or pessimism Risk  – the chance that some unfavorable event will occur o Useful to measure risk for comparative purposes Stand-Alone Risk –  the risk an investor would face if he or she held only one  asset o No investment should be undertaken unless the expected rate of return is  high enough to compensate of the perceived risk Statistics Probability Distribution –  a listing of possible outcomes or events with a  probability assigned to each outcome o Tighter the probability distribution, the lower the risk Use of standard deviation to quantify the tightness  Standard Deviation –  a statistical measure of the variability of a set of  observations o
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This note was uploaded on 02/25/2012 for the course FIN 4319 taught by Professor Toles during the Fall '08 term at Texas State.

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09_18_09 Ch8 Risk - Chapter8Outline:RateandRatesofReturn

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