Topic 5: Risk and Return Learning Outcomes introduction to risk and return expected return and risk on individual asset expected return and risk on portfolio systematic and unsystematic risk diversification capital asset pricing model (CAPM) and the security market line Risk and Return M K Lai Page 2 Introduction to Risk and Return finance can be complicated‚ but it can be reduced to three basic concepts cash flows Risk and Return time value of money risk
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Portfolio Management Case 1: Alex Sharpe’s Portfolio Executive Summary As Alex Sharpe’s consultant‚ we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds. This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%)‚ while the risk increases by only less than 10%. In Qualitative Analysis‚ we find that tobacco industry tends to move with the market less than the toy industry‚ which indicates that R.J Reynolds can diversity the
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equity risk premium. Edgar Lawrence Smith’s 1924 book Common Stocks as Long Term Investments […] was immediately cited by Yale’s Irving Fisher as an argument for investing in a diversified portfolio of equities over bonds.5 Fisher theorized that the trend towards investment in diversified portfolios of common stock had actually changed the equity premium in the 1920’s. Studies of various writers‚ especially Edgar Smith and Kenneth Van Strum have shown that in the long run stocks yield more
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Between CML AND SML CML vs SML CML stands for Capital Market Line‚ and SML stands for Security Market Line. The CML is a line that is used to show the rates of return‚ which depends on risk-free rates of return and levels of risk for a specific portfolio. SML‚ which is also called a Characteristic Line‚ is a graphical representation of the market’s risk and return at a given time. One of the differences between CML and SML‚ is how the risk factors are measured. While standard deviation is the measure
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ABSTRACT Modern portfolio managers find themselves facing an increasingly challenging situation with global asset allocation. The concept of traditional asset classification has been constantly questioned yet no consensus has been reached upon in either real practice or academia. Our research attempts to answer the question of whether or not the traditional asset class definition could prove to be optimal in terms of generating the best efficient frontiers‚ and if it exist alternatives to reach
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The company has since diversified into the sale of new‚ used‚ refurbished and collectible items in diverse categories. • In 2008‚ Amazon had eight warehouses in the U.S. and another fifteen in the rest of the world. Amazon supply chain portfolio • Amazon.com sells books‚ music‚ and other items over the Internet. • It is one of the largest e-commerce firms‚ with a market capitalization of more than $20 billion. • Amazon.com operates 7 websites that support their business
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the riskiness of a financial asset is measured in terms of the riskiness of its cash flows. (2)The riskiness of an asset may be measured on a stand-alone basis or in a portfolio context. An asset may be very risky if held by itself but may be much less risky when it is a part of a large portfolio. (3)In the context of a portfolio‚ the risk of an asset is divided into two parts: diversifiable risk (unsystematic risk) and market risk (systematic risk). Diversifiable risk arises from company-specific
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asset be 0.25‚ and the investor holds an equally weighted portfolio of these assets. How many of such assets should an investor hold so that the variance of her portfolio is zero? (b) If the correlation was 0.02 can the investor ever achieve a zero variance? (c) For the case that the correlation is 0.4‚ and the investor holds an equally weighted portfolio of 10 assets‚ calculate the amount of unsystematic and systematic risk in her portfolio. 2. (Diversification over time). Suppose an investor invests
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Employee Portfolio: Management Plan MGT/311-Organizational Development Employee Portfolio: Management Plan Employees’ values‚ personality‚ interests and skills are fundamental factors in distinguishing performing employees from incompetent. Self-assessments provide valuable feedbacks to managers to identify issues related to personality‚ and ideal candidates during the hiring process. In fact‚ “relying on an extensive amount of research‚ we can make some reasonably well-supported predictions
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T-Bills 5.5% 5.5 5.5 5.5 5.5 High Tech -27.0% -7.0 15.0 30.0 45.0 Collections 27.0% 13.0 0.0 -11.0 -21.0 1.0% 0.0 13.2 13.2 -0.87 U.S. Rubber 6.0%a -14.0 3.0 41.0 26.0 9.8% 18.8 1.9 0.88 Market Portfolio 2-Stock Portfolio -17.0% -3.0 10.0 25.0 38.0 0.0% 7.5 12.0 10.5% 15.2 1.4 3.4 0.5 a Note that the estimated returns of U.S. Rubber do not always move in the same direction as the overall economy. For example‚ when the economy
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