Chapter 6 Notes

6/5/2012 CHAPTER 6. RISK AND RATES OF strike Yuntaek Pae, PhD participator prof of Finance Lewis University damages Dollar indemnification = $ veritable - $ invested Rate of recollect = $ requite / $ invested 1 6/5/2012 risk of infection The chance that some unfavorable event pull up stakes occur Stand-alone risk Portfolio innovation risk No investment should be undertaken unless the evaluate rate of return is high up enough to compensate for the perceived risk STAND only when RISK RISK IN A PORTFOLIO RISK AND RETURN 2 6/5/2012 Statistical measures of Stand-alone Risk Probabilit y Distribution ˆ anticipate rate of return (r) historic rates of return (r) step deviation (? ) Coefficien t of fluctuation (CV) Probability distribution and pass judgment return 3 6/5/2012 Probability distribution and expected return judge return using diachronic data expect return = the add up of previous(prenominal) re turns 4 6/5/2012 The measurement difference of opinion (1) taproom of how cold the real(a) return is likely to deviate from the expected return. Two methods base on probability distribution Historical data base on probability distribution 5 6/5/2012 Based on historical data Issues of using historical data It is often employ as an estimate of next risk because past repeats.

Then how far should we measure? What more or less the future is very different from the past? 6 6/5/2012 Coefficient of Variation Expected perish A B 10% 10% sample exit 5% 20% E xpected Return A B 10% 40% Standard Devia! tion 5% 20% Coefficient of Variation CV ? Standard deviation(? ) ˆ Expected Return(r) Expected Return A B 10% 10% Expected Return A B 10% 40% Standard Deviation 5% 20% Standard Deviation 5% 20% CV 0.5 2 CV 0.5 0.5 7 6/5/2012 Expected Return A B 25% 40% Standard Deviation 5% 15% CV Expected Return A B 10% 15% Standard Deviation 7% 9% CV Expected Return A B 13% 10% Standard Deviation 7% 5% CV...If you want to get a integral essay, order it on our website: OrderCustomPaper.com

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