Risk in Portfolio Context. b. Market Risk. Quantified by Beta & used in. CAPM: Capital Asset Pricing Model. Relationship b/w market risk & required return as. Stand-alone risk; Portfolio risk; Risk & return: CAPM / SML. . The equation represents the risk and return relationship predicted by the Capital Asset Pricing . Calculate the market risk of a portfolio of investments. Explain the relationship between an investor's required rate of return on an investment and the riskiness of.
The risk-return relationship | Understanding risk | miyagi-marugoto2012.info
Maximize the value of the firm as determined by: Portfolio Risk Diversifiable Risk vs. Weather Forecast Outcome Probability Rain.
The probability is based upon the current conditions.
Given days with the current conditions the historyit will rain on 60 of the following days. We want to use the same logic when discussing the possible return from owning the stock - what is the history? To calculate Standard Deviation: Assuming that the returns are normally distributed: The actual return will be within one standard deviation They avoid risk In our example the expected return is the same for both stocks, but Intel is much riskier as measured by the standard deviation What if the expected returns were not the same?
Calculating the Coefficient of Variation: This teats upside and downside risk equally. An investor is often more concerned about the chance that a return falls below what is expected — or in other words the downside risk. Project risk can be offset by other projects undertaken by the firm. Which of the risks on the previous slide can be diversified? As an investor, which risks should you be more concerned with which can be diversified? Combines the relationship between the stocks with the volatility.
The covariance is difficult to compare when looking at different series. Therefore the correlation coefficient is used. The standard deviation can be calculated from each years portfolio expected return just like for an individual asset. BondBond A kind of loan you make to the government or a company. They use the money to run their operations.
In turn, you get back a set amount of interest once or twice a year. If you hold bonds until the maturity date, you will get all your money back as well.
- The Relationship Between Risk and Return
As a shareholderShareholder A person or organization that owns shares in a corporation. May also be called a investor. But if the company is successful, you could see higher dividends and a rising shareShare A piece of ownership in a company. But it does let you get a share of profits if the company pays dividends.
Some investments, such as those sold on the exempt market are highly speculative and very risky. They should only be purchased by investors who can afford to lose all of the money they have invested.
The risk-return relationship
DiversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.
May include stocks, bonds and mutual funds. The equity premium Treasury bills issued by the Canadian government are so safe that they are considered to be virtually risk-free. The government is unlikely to default on its debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.
At the other extreme, common shares are very risky because they have no guarantees and shareholders are paid last if the company is in trouble or goes bankrupt.