payments Risk potential variability in future cash flows standard deviation -a measure of risk when looking at stock in isolation standard deviation -measure of the dispersion of possible outcomes -Company-unique risk (unsystematic risk)-is diversifiable. This type of risk can be reduced through diversification. The result of factors that are unique to a particular firm -Market risk (systematic risk)is nondiversifiable. This type of risk cant be diversified away. -Market risk (systematic risk) -results
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CHAPTER 5 Risk and Return INSTRUCTOR’S RESOURCES Overview This chapter focuses on the fundamentals of the risk and return relationship of assets and their valuation. For the single asset held in isolation, risk is measured with the probability distribution and its associated statistics: the mean, the standard deviation, and the coefficient of variation. The concept of diversification is examined by measuring the risk of a portfolio of assets that are perfectly positively correlated
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Nofsinger define risk in the M: Finance textbook and how is it measured?" (Cornett, Adair, & Nofsinger, 2016). Distinguished-level: Describe the risk relationship between stocks, bonds, and T-bills, using the standard deviation of returns as the measure of risk. Answer Proficient-level: Risk is defined as the volatility of an asset’s returns over time. Specifically, the standard deviation of returns is used to measure risk. This computation measures the deviation from the average return. The idea is
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the systematic risk/market risk of individual investment with the risk of all shares in the market. It is also used to calculate cost of equity and incorporates risk. ARBITRAGE PRICING THEORY Arbitrage Pricing Theory was developed by the economist Stephen Ross in 1976. Arbitrage Pricing Theory assumes that each stock’s return to the investor is influenced by several independent factors. The APT model also states that the risk premium of a stock depends on two factors: The risk premium associated
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Barney Smith's economic forecasting staff has developed estimates for the state of the economy and its security analyst have developed a sophisticated computer program which was used to estimate the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and American Foam manufactures mattresses and various other foam products. Merril Finch also maintains an "index fund" which owns
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is a risk that the actual return on the investment will be different from the expected return. Investors take the risk of an investment into account when deciding on the return they wish to receive for making the investment. The CAPM is a method of calculating the return required on an investment, based on an assessment of its risk. SYSTEMATIC AND UNSYSTEMATIC RISK If an investor has a portfolio of investments in the shares of a number of different companies, it might be thought that the risk of the
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Chapter 6—The Tradeoff Between Risk and Return MULTIPLE CHOICE 1. Which of the following is an example of systematic risk? a. IBM posts lower than expected earnings. b. Intel announces record earnings. c. The national trade deficit is higher than expected. d. None of the above. ANS: C DIF: E REF: 6.4 The Power of Diversification 2. Which of the following is an example of unsystematic risk? a. IBM posts lower than expected earnings. b. The Fed raises interest rates unexpectedly. c. The rate of
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Risk and Return “Believe me! The secret of reaping the greatest fruitfulness and the greatest enjoyment from life is to live dangerously!” —Friedrich Wilhelm Nietzsche Are You the “Go-for-It” Type? The financial crisis has people buzzing about “systematic risk.” This term means different things in different contexts. Traditionally, systematic risk has referred to the non-diversifiable risk that comes from the impact the overall market has on individual investments. This risk is also known
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Unilever Indonesia. We also are required to demonstrate and explain the computations of annual return, risk, Sharpe ratio, return, covariance, beta, Treynor Ratio, portfolio standard deviation, and build a graph. THEORETICAL CONCEPTS In this assignment, we used the formula of Variances, Annual, Standard Deviation, Covariance, Correlation Coefficient, Beta, Variance Of Portfolio, Risk, Sharpe Ratio, Treynor Risk 1) Variance Variance measures how far a set of numbers is spread out. The variance measures
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1. Primary objective of the corporation Management has one basic, overriding goal – to create value for stockholders. Stockholders own the firm - it legally belongs to them. That ownership position gives stockholders the right to elect the directors, who then hire the executives who actually run the company. The directors, as representatives of the stockholders, determine managers’ compensation, presumably rewarding them if performance is superior or replacing them if performance is poor.
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