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Chapter trade-Off Between Risk & Return Chapter Risk, Return, and the capm
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tarix | 25.06.2018 | ölçüsü | 483 b. | | #51655 |
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Chapter 6 Trade-Off Between Risk & Return
Today’s Chapter 6 & 7 Topics
Risk and Return
Quick Review: Financial Return
Percentage Returns on Bills, Bonds, and Stocks, 1900 - 2003
Variance (2) - the expected value of squared deviations from the mean
Volatility of Asset Returns
Average Returns and St. Dev. for Asset Classes, 1900-2003
Probabilistic Expected Return Expected Rate of Return given a probability distribution of possible returns (ri): E(r) n E(R) = Pi Ri i=1
Relevant Risk Measure for single asset Variance = 2 = pi( ri - E(r))2 Standard Deviation = Square Root of Variance
Example: Exp. Return and
Example: Standard Deviation
Portfolio Risk and Return E(rp) = wiE(ri) = weighted average of the expected return of each asset in the portfolio In our example, MAD E(r) = 33.5% and CON E(r) = 7.5% What is the expected return of a portfolio consisting of 70% MAD and 30% CON?
Risk and Diversification E(rp) = wiE(ri) = .7(33.5%) + .3(7.5%) = 25.7%
Portfolio Risk Looking at a 2-asset portfolio for simplicity, the riskiness of a portfolio is determined by the relationship between the returns of each asset over different scenarios or over time. This relationship is measured by the correlation coefficient( ): -1<= < =+1 Lower = less portfolio risk compared to the weighted average of the standard deviations.
Example 70% MAD, 30% CON Portfolio
Average Return and St. Dev. for Individual Securities, 1994-2003
Average Return and St. Dev. for Individual Securities, 1994-2003
Diversification
Systematic and Unsystematic Risk
Systematic and Unsystematic Risk
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