Chapter 8 Notes - Risks & its Measurements

Chapter 8 Notes - Risks & its Measurements -...

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Financial Management – Chapter 8 What is Risk? The chance that something will come out worse than planned More generally, the variation in possible outcomes Why Does Risk Matter? Three attitudes toward risk Risk seeker Risk neutral Risk averter Most people’s attitude toward risk depends on the size of the gamble compared to the individual’s total wealth In the financial markets, most people are risk averters Risk and Financial Value For risk averters, risk reduces value by increasing required rates of return Recall the Fisher model Sources of Risk Business risk Environmental risk Process risk Financial risk The Total Risk Model Outcomes are summarized by a probability distribution Return – measured by the expected value of the distribution Risk – measured by the standard deviation of the distribution The Capital Market Line The Concept of a Portfolio A portfolio is a group of investments held together
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