Provide three reasons why nonhuman animals are sometimes

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.