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