m securitymarketline securitymarketline

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Unformatted text preview: et a basic quote Click on key statistics Example: Portfolio Betas Example: Portfolio Betas Consider the previous example with the following four securities Security DCLK KO INTC KEI Weight .133 .2 .267 .4 Beta 3.69 0.64 1.64 1.79 What is the portfolio beta? .133(3.69) + .2(.64) + .267(1.64) + .4(1.79) = 1.77 Beta and the Risk Premium Beta and the Risk Premium Remember that the risk premium = expected return – risk­free rate The higher the beta, the greater the risk premium should be Can we define the relationship between the risk premium and beta so that we can estimate the expected return? YES! Example: Portfolio Expected Example: Portfolio Expected Returns and Betas 30% Expected Return 25% E(RA) 20% 15% 10% Rf 5% 0% 0 0.5 1 1.5 βA Beta 2 2.5 3 Reward­to­Risk Ratio: Definition Reward­to­Risk Ratio: Definition and Example The reward­to­risk ratio is the slope of the line illustrated in the previous example Slope = (E(RA) – Rf) / (βA – 0) Reward­to­risk ratio for previous example = (20 – 8) / (1.6 – 0) = 7.5 What if an asset has...
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