Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.
Managerial Finance. "Risk and Return". Types of risk. Required return. Correlation. Diversification. Beta coefficient. Risk of a portfolio. Capital Asset Pricing Model. Security Market Line.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
This slideshow is about the Capital Asset Pricing Model (CAPM),developed by William Sharpe, John Lintner & Jan Mossin in 1960. It was developed as an extension of the portfolio theory of Markowitz. It is not an individual work of mine. This is a co-work of myself & Biyanka Jayawardhana, who is a colleague of mine.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
risk and return. Defining Return, Return Example, Defining Risk,Determining Expected Return , How to Determine the Expected Return and Standard Deviation, Determining Standard Deviation (Risk Measure), Portfolio Risk and Expected Return Example, Determining Portfolio Expected Return, Determining Portfolio Standard Deviation, Summary of the Portfolio Return and Risk Calculation, Total Risk = Systematic Risk + Unsystematic Risk,
This slideshow is about the Capital Asset Pricing Model (CAPM),developed by William Sharpe, John Lintner & Jan Mossin in 1960. It was developed as an extension of the portfolio theory of Markowitz. It is not an individual work of mine. This is a co-work of myself & Biyanka Jayawardhana, who is a colleague of mine.
Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return. The general idea behind CAPM is that investors need to be compensated in two ways: time value of money & risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk gauge (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
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Introduction to AI for Nonprofits with Tapp NetworkTechSoup
Dive into the world of AI! Experts Jon Hill and Tareq Monaur will guide you through AI's role in enhancing nonprofit websites and basic marketing strategies, making it easy to understand and apply.
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
Embracing GenAI - A Strategic ImperativePeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
Biological screening of herbal drugs: Introduction and Need for
Phyto-Pharmacological Screening, New Strategies for evaluating
Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
• The Committee on Ways and Means has been investigating several universities since November 15, 2023, when the Committee held a hearing entitled From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing. The Committee followed the hearing with letters to those institutions on January 10, 202
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
We can use the standard deviation (, pronounced “sigma”) to quantify the tightness of the probability distribution.7 The smaller the standard deviation, the tighter the probability distribution and, accordingly, the lower the risk.
If we assume that the probability distribution of returns for the Norman Company is normal, 68% of the possible outcomes would have a return ranging between 13.59 and 16.41% for asset A and between 9.34 and 20.66% for asset B; 95% of the possible return outcomes would range between 12.18 and 17.82% for asset A and between 3.68 and 26.32% for asset B; and 99% of the possible return outcomes would range between 10.77 and 19.23% for asset A and between 1.98 and 31.98% for asset B. The greater risk of asset B is clearly reflected in its much wider range of possible returns for each level of confidence (68%, 95%, etc.).
When the standard deviations (from Table 5.5) and the expected returns (from Table 5.4) for assets A and B are substituted into Equation 5.4, the coefficients of variation for A and B are 0.094 (1.41%15%) and 0.377 (5.66%15%), respectively. Asset B has the higher coefficient of variation and is therefore more risky than asset A—which we already know from the standard deviation. (Because both assets have the same expected return, the coefficient of variation has not provided any new information.)
Judging solely on the basis of their standard deviations, the firm would prefer asset C, which has a lower standard deviation than asset D (9% versus 10%). However, management would be making a serious error in choosing asset C over asset D, because the dispersion—the risk—of the asset, as reflected in the coeffi- cient of variation, is lower for D (0.50) than for C (0.75). Clearly, using the coef- ficient of variation to compare asset risk is effective because it also considers the relative size, or expected return, of the assets.
To reduce overall risk, it is best to combine, or add to the portfolio, assets that have a negative (or a low positive) correlation. Combining negatively correlated assets can reduce the overall variability of returns. Figure 5.6 shows that a portfolio containing the negatively correlated assets F and G, both of which have the same expected return, k, also has that same return k but has less risk (variability) than either of the individual assets. Even if assets are not negatively correlated, the lower the positive correlation between them, the lower the resulting risk. Some assets are uncorrelated—that is, there is no interaction between their returns. Combining uncorrelated assets can reduce risk, not so effectively as com- bining negatively correlated assets, but more effectively than combining positively correlated assets.
The assets therefore have equal return and equal risk. The return patterns of assets X and Y are perfectly negatively correlated. They move in exactly opposite directions over time. The returns of assets X and Z are per- fectly positively correlated. They move in precisely the same direction.
The risk in this portfolio, as reflected by its standard deviation, is reduced to 0%, whereas the expected return remains at 12%. Thus the combination results in the complete elimination of risk. Whenever assets are perfectly negatively correlated, an optimal combination (similar to the 50–50 mix in the case of assets X and Y) exists for which the resulting standard deviation will equal 0.
Three possible correlations—perfect positive, uncorrelated, and perfect nega- tive—illustrate the effect of correlation on the diversification of risk and return. Table 5.9 summarizes the impact of correlation on the range of return and risk for various two-asset portfolio combinations. The table shows that as we move from perfect positive correlation to uncorrelated assets to perfect negative corre- lation, the ability to reduce risk is improved. Note that in no case will a portfolio of assets be riskier than the riskiest asset included in the portfolio. In all cases, the return will range between the 6% return of R and the 8% return of S. The risk, on the other hand, ranges between the individual risks of R and S (from 3% to 8%) in the case of perfect positive correlation, from below 3% (the risk of R) and greater than 0% to 8% (the risk of S) in the uncorrelated case, and
between 0% and 8% (the risk of S) in the perfectly negatively correlated case.
note that as the correlation becomes less positive and more negative (moving from the top of the figure down), the ability to reduce risk improves.
Figure 5.8 depicts the behavior of the total portfolio risk (y axis) as more securities are added (x axis). With the addition of securities, the total portfolio risk declines, as a result of the effects of diversification, and tends to approach a lower limit. Research has shown that, on average, most of the risk-reduction benefits of diver- sification can be gained by forming portfolios containing 15 to 20 randomly selected securities.17
Diversifiable risk (sometimes called unsystematic risk) represents the portion of an asset’s risk that is associated with random causes that can be eliminated through diversification. It is attributable to firm-specific events, such as strikes, lawsuits, regulatory actions, and loss of a key account. Nondiversifiable risk (also called systematic risk) is attributable to market factors that affect all firms; it can- not be eliminated through diversification. (It is the shareholder-specific market risk described in Table 5.1.) Factors such as war, inflation, international inci- dents, and political events account for nondiversifiable risk. Because any investor can create a portfolio of assets that will eliminate virtu- ally all diversifiable risk, the only relevant risk is nondiversifiable risk. Any investor or firm therefore must be concerned solely with nondiversifiable risk. The measurement of nondiversifiable risk is thus of primary importance in select- ing assets with the most desired risk–return characteristics.
Because any investor can create a portfolio of assets that will eliminate virtu- ally all diversifiable risk, the only relevant risk is nondiversifiable risk. Any investor or firm therefore must be concerned solely with nondiversifiable risk. The measurement of nondiversifiable risk is thus of primary importance in select- ing assets with the most desired risk–return characteristics.
The tendency of a stock to move with the market is measured by its beta coefficient, b. Ideally, when estimating a stock’s beta, we would like to have a crystal ball that tells us how the stock is going to move relative to the overall stock market in the future. But since we can’t look into the future, we often use historical data and assume that the stock’s historical beta will give us a reasonable estimate of how the stock will move relative to the market in the future.
Note that the horizontal (x) axis measures the historical market returns and that the vertical (y) axis mea- sures the individual asset’s historical returns. The first step in deriving beta involves plotting the coordinates for the market return and asset returns from various points in time. Such annual “market return–asset return” coordinates are shown for asset S only for the years 1996 through 2003. For example, in 2003, asset S’s return was 20 percent when the market return was 10 percent. By use of statistical techniques, the “characteristic line” that best explains the relationship between the asset return and the market return coordinates is fit to the data points.18 The slope of this line is beta.
The return of a stock that is half as respon- sive as the market (b .5) is expected to change by 1/2 percent for each 1 percent change in the return of the market portfolio. A stock that is twice as responsive as the market (b 2.0) is expected to experience a 2 percent change in its return for each 1 percent change in the return of the market portfolio.
Portfolio betas are interpreted in the same way as the betas of individual assets. They indicate the degree of responsiveness of the portfolio’s return to changes in the market return. For example, when the market return increases by 10 percent, a portfolio with a beta of .75 will experience a 7.5 percent increase in its return (.75 10%); a portfolio with a beta of 1.25 will experience a 12.5 per- cent increase in its return (1.25 10%). Clearly, a portfolio containing mostly low-beta assets will have a low beta, and one containing mostly high-beta assets will have a high beta.
The preceding section demonstrated that under the CAPM theory, beta is the most appropriate measure of a stock’s relevant risk. The next issue is this: For a given level of risk as measured by beta, what rate of return is required to compensate investors for bearing that risk?
risk-free of interest, RF, which is the required return on a risk-free asset, typically a 3-month U.S. Treasury bill (T-bill), a short-term IOU issued by the U.S. Treasury
The market risk premium, RPM, shows the premium that investors require for bearing the risk of an average stock. The size of this premium depends on how risky investors think the stock market is and on their degree of risk aversion.
the higher the beta, the higher the required return,
and the lower the beta, the lower the required return.