expected return Measuring portfolio total risk: variance and standard deviation Market portfolio Measuring systematic risk: Beta Section II: Markowitz Portfolio Theory Efficient portfolio and Efficient Frontier Capital Asset Pricing Model - CAPM CAPM lines: CML and SML PORTFOLIO A portfolio is a collection of assets Diversification - Strategy designed to reduce risk by spreading the portfolio across many investments. Diversification reduces risk because
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CHARACTERIZING RISK AND RETURN Questions LG1 1. Why is the percentage return a more useful measure than the dollar return? The dollar return is most important relative to the amount invested. Thus, a $100 return is more impressive from a $1,000 investment than a $5,000 investment. The percentage return incorporates both the dollar return and the amount invested. Therefore, it is easier to compare percentage return across different investments. LG2 2. Characterize the historical return, risk
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Investment Management i) The term investment refers to funds invested in various securities — consisting of Government and semi Govt. securities, loans, debentures, shares and bonds etc. ❖ Elements of Investment :- a) Reward (Return) b) Risk and Return c) Time ❖ Nature of Investment :- Investment requires a continuous flow of decisions which can not be avoided. The investment decisions are based on many streams of data which taken together, represent to an investor
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Chapter 6. Risk, Return, and CAPM Dollar return: Amount to be received-Amount invested Rate of return: Amount received-Amount investedAmount invested Stand-alone risk is the risk an investor has in just holding the one asset Expected rate of return: r=i=1npiri Where P is probability of i outcome and r is the rate of return The more leptokurtic the distribution, the more likely the actual outcome will be closer to the expected return. Measuring Standalone Risk: Standard Deviation 1. Expected
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Characterizing Risk and Return * Question 1: * Proficient-level: "How do Cornett, Adair, and Nofsinger define risk in the M: Finance textbook and how is it measured?" (Cornett, Adair, & Nofsinger, 2016). 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 to use standard deviation, a measure of volatility of past returns to proxy
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forecast will accurately predict the future return of this stock. We are comfortable because 74.15% of the return is coming from stock return for systematic risk and the balance is return for business risk. BS – Multiple R = 76.73% we are comfortable that this forecast will accurately predict the future return of this stock. We are comfortable because 76.73% of the return is coming from stock return for systematic risk and the balance is return for business risk. DIS – Multiple R = 80.35% we are comfortable
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Beta (β) and Stock Returns - An Analysis of Select Companies I INTRODUCTION During the past three decades, CAPM (Capital Asset Pricing Model) has been studied in great depth and is used as the standard risk-return model by various researchers and academicians. The basic premise of CAPM is that the stocks with a higher beta yield higher returns for the investors. One of the conditions stipulated in the model is that the said return should be higher than the return of the risk-free asset. But
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The case gave a table that had the rate or return under certain conditions and from that we found the expected returns, standard deviations, and coefficients of variations for the assets. For the expected returns we took the probability and multiplied that by the rate of return for each type of economy, and then added them all up. To get standard deviation you must first calculate the variance. For that we took the rate of return minus expected return, squared that difference, multiplied that by
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Week 2 Assignments 5.3) Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows: |Investment |Expected Return |Expected risk index | |X
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calculate the projected return on the equity of a single company. CAPM is based on risk free rate, the expected return rate on the market and beta coefficient of a single portfolio and security. Re = Rf + β [E(Rm) - (Rf)] According to the formula, Re represents the Return on Equity, Rf is for the risk-free rate, E(Rm) denoted to expected rate of return on the market, and β is the beta coefficient and E(Rm) - Rf is the difference among the expected market rate of return and the risk-free rate, is known
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