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
