Chapter 8 Risk and Rates of Return

* The riskiness of a portfolio is NOT the weighted average of the individual assets standard deviations.

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What are the ways you can quantify the portfolio risk

-Diversifiable risk and Market Risk

write out the formula for capm

...

The probabilities all must =..?

1

What are the 2 ways an assets risk can be analyzed?

1. Stand Alone 2. A Portfolio Context

What are 2 investor attitudes towards risk?

1. risk aversion 2. Risk Premium

the tighter the probability distribution the ______the risk.

Lower

What is this? (rm-rf)

Market Risk Premium

An asset held in a______ is less risky than the same asset held in isolation.

Portfolio

a collection of assets held by an investor.

Portfolio

combining the cash flows from different assets.

Portfolio

The chance that an event will occur

Probability

a listing of all possible outcomes and the probability of each occurrence.

Probability Distribution

The chance that some unfavorable event will occur.

Risk

assumes investor dislike risk and require higher rates of return to encourage them to hold riskier securities.

Risk Aversion

the difference between the return on a risky asset and a risk-less asset, which serves as compensation for investors to hold riskier securities.

Risk Premium

The greater the chance of lower or negative returns the _____ the investment.

Riskier

analyzing an asset's cash flows by themselves.

Stand Alone

-measures total or stand alone risk -the larger the O the lower the probability that actual returns will be closer to expected returns.

Standard Deviation

qualifies the tightness of the probability distribution.

Standard Deviation

allows us to choose between two investments in which one has the higher expected return but the other has the lower risk.

Standard deviation

What are the ways you can quantify the stand alone risk?

Standard deviation and coefficient of variation

the rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results.

The Expected Rate of Return

The riskiness of an asset is based on what?

The riskiness of the cash flows

Can we define the relationship between risk premium and bets so that we can estimate the expected return?

Yes!

What does beta tell us?

a metric that shows the extent to which a given stock's returns move with the stock market.

How do you calculate return?

ending value-cost/cost

used to measure systematic risk

Beta

a model based on the proposition that any stocks required rate of return is equal to the risk free rate of return plus the risk premium that reflects only the risk remaining after diversification.

CAPM

describes systematic risk and rates of return

CAPM

What does CAPM stand for?

Capital Asset Pricing Model

A standardized measure of dispersion about the expected value that shows the risk per unit of return.

Coefficient of Variation

The higher the CV the_____the risk.

Higher