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
Premium Financial markets
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
Premium Investment
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
Premium Investment Risk Financial markets
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
Premium Investment
Investment Theory and Strategies A. Passive vs. Active Strategy i. Passive One of the most profound ideas affecting the investment decision process‚ and indeed all of finance‚ is the idea that the securities markets‚ particularly the equity markets‚ are efficient. In an efficient market‚ the prices of securities do not depart for any length of time from the justified economic values that investors calculate for them. Economic values for securities are determined by investor expectations about earnings
Premium Stock market Option Financial markets
_____________________________________________________________________ Course Study Guide 2011–12 Course Code: BUS1331 Course title: Value Chain Management Course Leader: Dr. Michael Babula‚ MBA‚ PhD ____________________________________________________________________________ Contents 1. 2. WELCOME ........................................................................................................................................ 3 INTRODUCTION TO THE COURSE ......................
Premium Value chain Management Customer service
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
Premium Normal distribution Variance Investment
Meaning of Risk and Uncertainty Risk: In Common Parlance‚ risk means a low probability of an expected outcome. From business decision-making point of view‚ risk refers to a situation in which a business decision is expected to yield more than one outcome and the probability of each outcome is known to the decision makers or can be reliably estimated. For example‚ if a company doubles its advertisement expenditure‚ there are three probable outcomes: i) Its sales may more than double ii)
Premium Risk Investment Arithmetic mean
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
Premium Investment Rate of return Standard deviation
line (SCL) and obtain an estimate of its true beta coefficient; then we use the findings to estimate and plot the Security Market Line (SML). In doing so‚ we have two purpose to fulfill. First‚ demonstrating the fact that the total variance of a portfolio approaches the systematic variance as diversification increases‚ which means diversifying across industries offer benefit over diversifying within a given industry. Second‚ using the figures estimated to testify that the CAPM works in practice.
Premium Investment Financial markets Statistics