Finance: Chapter 13
Brandon Nimmo has a 10,000 portfolio of which 500,00 in bond, 3,000 is in alternative investments and the remainder in equities. What is his equity portfolio weight?
65%
Capital Asset Pricing Model (CAPM)
Pure Time Value of Money, Reward for Bearing Systematic Risk, Amount of Systematic Risk
Unsystematic risk
a risk that affects at most a small number of assets, also unique or asset-specific risk
Systematic risk
a risk that influences a large number of assets, also market risk
Risk premium
=Expected return - Risk free rate
Mike Plazza is asking you to tell him about the Capital Asset Pricing Model. What will you tell him?
CAPM shows the expected return for a particular asset, CAPM incorporates the pure time value of money, CAPM explains the reward for bearing systematic risk, CAPM alerts you to the amount of systematic risk of a particular risk
Tom Seaver is looking to eliminate unsystematic risk in his portfolio which comprises 2 mm shares of Tesla. What is the best way he can go about doing that?
Diversify with shares in multiple industries
Capital Asset Pricing Model Formula
E (R ) = R(f) + [E (Rm) - R(f)] * Beta
Total return=
Expected return + Unexpected return
Portfolio
Group of assets held by an investor
Investors tend to own more than one stock, where in return
Portfolio and portfolio return become a greater risk
Portfolio weight
The percentage of a portfolios total value that is invested in a particular asset, sector or type of security
Expected return
The return on a risky asset expected in the future
Measuring systematic risks
beta coefficient
Excepted return
depends on certain information shareholders have on stock
Unsystematic risk is also called
diversifiable risk, unique risk, or asset specific risk
Unsystematic risk is eliminated by
diversification
Beta coefficient
how much systematic risk a particular asset has relative to an average asset, in regard to its volatility
Systematic risk is also called
nondiversifiable risk or market risk
Diversification reduces risk but
only up to a point, some risk is diversifiable and some is not
Principle of diversification
spreading an investment across a number of assets will eliminate some, but not all, of the risk
Systematic risk principle
the expected return on a risky asset depends only on that asset's systematic risk
If a portfolio has equal investments in each asset
the portfolio weights are all the same
Diversification
to lay off the riskiness of an individual asset by the formation of a portfolio