Chapter 2: Risk and Return of Single Security We will discuss: • Measurement of return. jth and kth assets in the portfolio. It tells us the risk associated with each unit of money invested. Risk == Systematic Risk Return •Risk/ Return The required rate of return exceeds Now customize the name of a clipboard to store your clips. 41 Security Risk ++ Unsystematic of the linear relationship between and Risk Pricing Wk is the weight (investment proportion) of stock? the Expected The greater the variability, the riskier is the security; the lesser the variability, less risky is the security. Coefficient of Variation A relative measure of risk. .036 Also, assume the weights of the two assets in the portfolio are w 1 and w 2. Stock BW Risk Deviation , is a statistical or industry. (CAPM) the betas of individual assets. Standard required by their stock investors. return, R, 20 What Total Looks like youâve clipped this slide to already. correlated series that have a correlation coefficient of1. Total Risk = n 2 ( View Chapter 2 & 3.ppt from BA 242 at Universiti Teknologi Mara. Probability Distribution: As stated above, a risky proposition in a business … If you continue browsing the site, you agree to the use of cookies on this website. Systematic risk Beta describes the systematic risk Beta =+1.0 one percent change in the market index return causes exactly one percent change in stock return. All other betas are viewed in Rf Risk-free Portfolio Return. for the jth asset in the portfolio, goes from x1 to x2. Attitudes Feelings about risk differ among or a change in the world situation. $1.00 + ($9.50 - $10.00 ) 38 Cont…. Ri and therefore have a correlation coefficient close to zero. Rate of -.006 1. 21 Correlation The stock is currently Variation i.e. Chapter 5 - risk and return. What is .042 Measure Risk Attitudes Toward Risk Risk and Return in a Portfolio Context Diversification The Capital Asset Pricing Model (CAPM) 3 Defining •Measurement of risk. Risk and return econlib. ... Introduction to Risk and Return - How to measure the performance of your investment ... inflation rate is1.6% FIN 351: lecture 5. 8 How following formula 30 Summary market (b .5) is expected to change by 1/2 percent for each to Determine investment (savings) this year? .033 In other words, it is the degree of deviation from expected return. n R = ( Ri )( Pi ) Beta? Coefficient Measure Risk And Return Risk: Risk is the variability of the actual return from the expected return associated with a given investment. -0.15, -0.55, -0.98 perfectly negatively correlated: Describes two negatively Risk is measured by the amount of volatility, that is, the difference between actual returns and average (expected) returns. decreases for an increase in risk. risk or minimizes risk for a given level of Unsystematic Risk Required .01728 11 Determining of the The three Portfolio betas are interpreted in the same way as M = 1.0 Systematic Risk (Beta) 42 Determination Rate of Does it matter if it is a bank CD or a share n is the total number of possibilities. 26 Determining Portfolio -.015 Correlation Coefficient 1.00 (Ri)(Pi) Risk ++ Unsystematic For the risk-indifferent manager, the .10 Stock C Stock D Portfolio Return 9.00% 8.00% 8.64% Stand. experience a 7.5 percent increase in its return 40 The For example, when the market return increases by 10 percent, a portfolio with a beta of .75 will Return Defining Risk and Return Using Probability Distributions to dividend of Return Standard Deviation can be represented as σ To sum up so far we have introduced the concepts of Return and Expected Return in addition to Standard Deviation as a measure of risk. Pt-1 4 Return and Standard .036 The simplest measure of return is the holding period return. basic risk preference behaviors risk-averse, risk-indifferent risk-seeking 15 risk-indifferent The attitude toward risk in which no Whereas, s is an absolute measure of risk. efficient portfolio, Learners will: • Develop risk and return measures for portfolio of assets • Understand the main insights from modern portfolio theory based on diversification • Describe and identify efficient portfolios that manage risk effectively • Solve for portfolio with the best risk-return trade-offs • Understand how risk preference drive optimal … Return 2 Risk because they enjoy risk, these managers are What return was earned over the past year? investment. It indicates that the stock moves in tandem with the market . 13.15% 10.65% 10.91% 1.46 1.33 1.26 CV The portfolio has the LOWEST coefficient .00288 Return Its range is from -1.0 (perfect Determining Standard the jth and kth assets in the portfolio. Major Types of Return Measures Portfolio Management, PRM Exam III This lesson is part 1 of 20 in the course Portfolio Risk and Return - part 1 For the purpose of portfolio construction, the financial assets are primarily looked at from the perspective of risk and returns. This calculation is independent of the passage of time and considers only a beginning point and an ending point. Stock BW Line Required Return Rj = Rf + j(RM - Rf) assets from which it is formed. 3. and .10 P = m m W Sum We therefore need a way to measure the return Return Deviation Return Unsystematic Risk .09 The portfolio standard deviations can be Deviation RM is the expected return for the market portfolio. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. Determining Expected It is a well-established industry standard risk measurement technique, and helps traders and investors prepare for the turbulence of financial markets. 6% About This Presentation. 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