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FIN 323 : Chapter 11 : Risk and Return

by: Leosinh

FIN 323 : Chapter 11 : Risk and Return FIN 323

Marketplace > Marshall University > Business > FIN 323 > FIN 323 Chapter 11 Risk and Return
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About this Document

First part of the exam
Principles of Finance
Dr. Shaorong Zhang
Class Notes
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This 5 page Class Notes was uploaded by Leosinh on Friday April 1, 2016. The Class Notes belongs to FIN 323 at Marshall University taught by Dr. Shaorong Zhang in Spring 2016. Since its upload, it has received 18 views. For similar materials see Principles of Finance in Business at Marshall University.


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Date Created: 04/01/16
Chapter 11 : Risk and Return. Important More Important Most important Expected Returns and Variances Expected Return : Return on risky asset expected in the future. Risk premium = Expected Return – Risk-free rate Portfolios : Portfolios is group of assets such as stocks and bonds held by an investor. Portfolio weight : percentage of a portfolio’s total value in a particular asset. Portfolio expected returns: Announcements, Surprises, And expected returns : Expected and Unexpected Returns : Total return = Expected return + Unexpected return ( R = E( R ) + U. Announcements and News : Announcement = Expected part + Surprise Risk : Systematic and Unsystematic. Systematic risk : a risk that influences a large number of assets. Also market risks. For example : GDP , Interest rates, inflation. Unsystematic risk : a risk that affects at most a small number of assets. Also unique or asset specific risk. Systematic and Unsystematic Components of Return R = E( R) + Systematic portion + Unsystematic portion. Diversification and Portfolio Risk : The principle of diversification : spreading an investment across a number of assets will eliminate some, but not all, of the risk. Unsystematic risk is essentially eliminated by diversification, so a relatively large portfolio has almost no unsystematic risk. Diversification and systematic risk : Total risk = Systematic risk + Unsystematic risk. Systematic risk and beta : Systematic risk principle : the expected return on a risky asset depends only on that assets’ systematic risk. The expected return on an asset depends only on that asset’s systematic risk. Measuring Systematic Risk Beta coefficient : amount of systematic risk present in a particular risky asset relative to that in an average risky asset. The Security Market Line : The Reward-to-Risk Ratio The basic argument  The reward-to-risk ratio must be the same for all the assets in the market. The Security Market Line : The security market line (SML) : positively slopped straight line displaying the relationship between expected return and beta. Market risk premium : slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate. The Capital Asset Pricing Model : (CAPM ) : equation of the SML showing the relationship between expected return and beta. 1) The pure time of money 2) The reward for bearing systematic 3) The amount of systematic risk.


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