Risk%20%26%20 Retirn%204
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Risk%20%26%20 Retirn%204

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FINANCE,CFM

FINANCE,CFM

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    Risk%20%26%20 Retirn%204 Risk%20%26%20 Retirn%204 Presentation Transcript

    • Risk & Return
      • Risk is like pornography. It is hard to define but you know it when you see it.
      • John Wachowicz
    • Return
      • Dividend/ Coupon
      • Current yield
      • Capital gains
      • Return = (Div t + ( P t – P t-1 ))/ P t-1
    • Risk
      • Actual return is different from expected return
      • A random variable subject to a probability distribution
      • Possible scenarios
      • Returns in each of those scenarios
      • Mean and standard deviation
      • Attitude towards risk – Risk averse investors
      • Return and risk in a portfolio context
      • Systematic and unsystematic risk
      • Concept of risk premium
    • Return Variability A B C Investment A: no return variation, no risk Investment B: some return variation, some risk Investment C: wide return variation, much risk 4.0% 2.5% 6.00% 15% -8%
      • ..Copy of Risk_in_FM. xls
    •  
      • 1926-2000 Average Annual Std Rate of Return Dev
      • Treasury Bills 3.9 3.2 Government Bonds 5.7 9.4 Corporate Bonds 6.0 8.6 Common Stocks 13.0 20.2 Small-firm stocks 17.3 33.2
    • Capital Asset Pricing Model
      • The expected risk premium varies in direct proportion to beta.
      • The security market line
      • r = r f +  (r m – r f )
      • Expected risk premium = beta * expected risk premium on the market
    •