08-CALI - RiskandReturn BKM:Chapter5 1 RiskandReturn 2...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Risk and Return BKM: Chapter 5 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Risk and Return 2
Background image of page 2
What’s so bad about volatility? Higher volatility means higher probability of  losses, but also higher probability of gains! Do gains give us as much joy as losses  cause us pain? 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Law of Diminishing Utility implies that the  pain we feel from a loss is greater than the  joy we feel from a gain of equal magnitude. This implies we don’t like volatility.   Human Preferences
Background image of page 4
The Framework Only two assets to choose: A risk-free bond Some other   risky asset Can be a single stock or portfolio of stocks Can short the bond, or borrow Shorting the risk-free bond is the same as  borrowing. 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Borrowing as Short-Selling You can think of borrowing as short-selling  a risk-free bond. Borrow $909.09 at 10%        Short-sell 1 bond     FV = 1000, Price = 909.09                     • Get $909.09 now • Get $909.09 now • Pay $1000 in future • Pay $1000 in future 6
Background image of page 6
The Portfolio Decision The more you put in risky asset: Expected return increases HOW MUCH higher? Risk increases HOW MUCH GREATER? What is the tradeoff as I increase my portfolio  weight in the risky asset? Combine Stat Rules #1 and #2 7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Portfolio of Risk-Free Asset and  One Risky Asset Expected Return: Standard Deviation: ( 29 ( ) ( ) 1 p S f E r wE r w r = + - p S w σ = 8
Background image of page 8
Example E[r s ]=8% σ s =.12 r f =4% E[r p ]=wE[r S ]+(1-w)r f σ p =w σ s   Risky Risk-Free A: 0%    100% B: 100%         0% C:  50%        50% D: 150%      -50%        4% E[r p ] σ p A 8% .12 B .06 6% C .18 10% D 9
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Capital Allocation Line: What is the equation for the line? Clearly, the intercept is the risk-free rate
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 28

08-CALI - RiskandReturn BKM:Chapter5 1 RiskandReturn 2...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online