# What is risk what the possibility that an actual

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Unformatted text preview: t The possibility that an actual return The actual will differ from our expected return. expected Uncertainty in the distribution of Uncertainty possible outcomes. possible What is Risk? What Uncertainty in the distribution of Uncertainty possible outcomes. possible What is Risk? What Uncertainty in the distribution of Uncertainty possible outcomes. possible Company A 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 4 10 return 14 What is Risk? What Uncertainty in the distribution of Uncertainty possible outcomes. possible Company A 0.5 0.2 0.45 0.18 0.4 0.16 0.35 0.14 0.3 0.12 0.25 0.1 0.2 0.08 0.15 0.06 0.1 0.04 0.05 0 Company B 0.02 4 10 return 14 0 -10 -5 0 8 14 18 return 22 25 30 How do we Measure Risk? How A scientific approach is to examine scientific the stock’s standard deviation of standard returns. returns. Standard deviation is a measure of Standard the dispersion of possible outcomes. dispersion The greater the standard deviation, The the greater the uncertainty, and therefore , the greater the risk. therefore Portfolios Portfolios Combining several securities Combining in a portfolio can actually portfolio reduce overall risk. reduce How does this work? Suppose we have stock A and stock B. The returns on these stocks do no...
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