chapter 3 risk

Risk

-A measure of the uncertainty of returns or uncertainty about future conditions that may affect the value of money -Measurement of the volatility of rates of return.

STAND-ALONE RETURN AND RISK

-Consider the investor's risk as if only one asset were held -Examine the stand-alone expected rate of return and stand-alone risk in isolation from other investments - The sum of each possible outcome multiplied by its probability - PROJECTED RETURN (K) x PROBABILITY (P)= PROBABLE RETURN (K x p) high+ average+ low를 다하여 expected rate of return 을 구한다

Rate of return:

-the gain or loss of an investment over a period of time -the investments' return by measuring the return per investment unit return/investment Return= Amount received- invested = Expected cash flows

PORTFOLIO RETURN AND RISK

Analyzing investment return and risk by holding more than one asset - The sum of the weighted average of the expected returns of each asset amount of invest/ total amount of invest x probability = probable return 그다음 probable return 을 다 더하면 expected ROR

Level of risk A comparative evaluation of risk

Credit Quality ( decrease ) total risk ( increase ) e.g. NFL franchise ( less ) vs. WNBA ( more ) e.g. Boston Red Sox ( less ) vs. Kansas City Royals ( more )

Risk-free rate:

Interest paid on risk-free investments that provide guaranteed return.

Risk of time The future is uncertain

Length of time invested (increase) total risk (increase) Length of time invested ( more ) Risk ( more ) e.g. Value: Past $ 1M ( > ) ≠ Present $ 1M ( > ) ≠ Future $ 1M 투자 기간이 길면 리스크도 많다

Risk-free investments:

No chance of loss

Determinants of Interest Rates

Nominal interest rate= The real risk-free rate+ Multiple risk premiums

Risk premium:

Rate of return required over and above the risk-free rate added as level of risk increases. " Total risk = risk-free rate + risk premium

Measuring Risk- Level of Risk

Risk-free rate+ risk premium = total risk Risk premium ( more ) -Credit quality ( less )- Total risk ( more) 리스크 프리미엄 높다는건 신용이 낮다는 것이고 그리니까 총 리스크도 올라간다

Measuring Risk- Risk of Time

Risk-free rate+ risk premium = total risk Risk premium ( more )length of time invested ( more )Total risk ( more ) rik free rate + time risk + risk premium = interest rate 투자 시간이 길면 리스크 프리미엄, 총 리스크 높아진다

Investment risk:

The likelihood of low or negative futurereturns Lower team values represent greater risk, because the reduction of risk or uncertainty of future cash flows is a component of value.

Beta Coefficient

Volatility ∝ risk b > 1.0 : the stock has risk greater than the (overall) market

Relationship Between Risk and Return

lesser the risk , the lower return 리스크가 낮으면 리턴도 낟고 the greater the risk, the higher he return 리스크다 크면 리턴도 높다

Volatility

the amount of fluctuation that occurs in a series of similar investment returns and the degree to which those returns deviate from the average - higher is safer, more flat is more risky

Beta

the degree to which a stock increases or decreases with the increase or decrease of the market.