1 Investors are concerned with two principal properties inherent in securities: The return that can be expected from holding a security. The risk i.e.

Slides:

Advertisements

Similar presentations

Risk and Return Learning Module.

Advertisements

Risk and Rates of Return Besley: Chapter 5 Pages

Ch 6.Risk, Return and the CAPM. Goals: To understand return and risk To understand portfolio To understand diversifiable risks and market (systematic)

Principles of Managerial Finance 9th Edition

Risk and Rates of Return

CHAPTER TWENTY-FOUR PORTFOLIO PERFORMANCE EVALUATION.

Chapter 5: Risk and Rates of Return

Chapter 6 The Returns and Risks from Investing. Explain the relationship between return and risk. Sources of risk. Methods of measuring returns. Methods.

Chapter 5 Risk and Rates of Return © 2005 Thomson/South-Western.

Defining and Measuring Risk

Lecture: 4 - Measuring Risk (Return Volatility) I.Uncertain Cash Flows - Risk Adjustment II.We Want a Measure of Risk With the Following Features a. Easy.

11.1 Expected Returns and Variances

Unit 2 – Measures of Risk and Return The purpose of this unit is for the student to understand, be able to compute, and interpret basic statistical measures.

GBUS502 Vicentiu Covrig 1 Risk and return (chapter 8)

Risk and Return (Ch. 5) 04/24/06. How Investors View Risk and Return Investors like return. They seek to maximize return. Investors like return. They.

RISK AND RETURN Rajan B. Paudel. Learning Outcomes By studying this unit, you will be able to: – Understand various concepts of return and risk – Measure.

Chapter 2 RISK AND RETURN BASICS. Chapter 2 Questions What are the sources of investment returns? How can returns be measured? How can we compute returns.

FIN352 Vicentiu Covrig 1 The Returns and Risks From Investing (chapter 6 Jones )

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 05 RISK&RETURN. Formal Definition- RISK # The variability of returns from those that are expected. Or, # The chance that some unfavorable event.

Measuring Returns Converting Dollar Returns to Percentage Returns

Risk, Return, and Security Market Line

1 Chapter 2: Risk & Return Topics Basic risk & return concepts Stand-alone risk Portfolio (market) risk Relationship between risk and return.

5-1 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM / SML.

1 MBF 2263 Portfolio Management & Security Analysis Lecture 2 Risk and Return.

Portfolio Management-Learning Objective

Investment Analysis and Portfolio Management Chapter 7.

Lecture Four RISK & RETURN.

Ch 6.Risk, Return and the CAPM. Goals: To understand return and risk To understand portfolio To understand diversifiable risks and market (systematic)

Risks and Rates of Return

Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western 5191 Natorp Blvd. Mason, OH Chapter 11.

CHAPTER 4 Risk and Return- The Basics

Chapter 4 Risk and Rates of Return © 2005 Thomson/South-Western.

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 5 Risk and Return.

1 The Returns and Risks from Investing Chapter 6 Jones, Investments: Analysis and Management.

Chapter 7 – Risk, Return and the Security Market Line  Learning Objectives  Calculate Profit and Returns  Convert Holding Period Returns (HPR) to APR.

Chapter 08 Risk and Rate of Return

Real Estate Investment Performance and Portfolio Considerations

Review Risk and Return. r = expected rate of return. ^

1 Risk Learning Module. 2 Measures of Risk Risk reflects the chance that the actual return on an investment may be different than the expected return.

The Basics of Risk and Return Corporate Finance Dr. A. DeMaskey.

FIN303 Vicentiu Covrig 1 Risk and return (chapter 8)

Investment Risk and Return. Learning Goals Know the concept of risk and return and their relationship How to measure risk and return What is Capital Asset.

Finance 300 Financial Markets Lecture 3 Fall, 2001© Professor J. Petry

CHAPTER SIX The Returns and Risks from Investing CHAPTER SIX The Returns and Risks from Investing Cleary / Jones Investments: Analysis and Management.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Essentials of Managerial Finance by S. Besley & E. Brigham Slide 1 of 27 Chapter 4 Risk and Rates of Return.

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 4 Risk and Portfolio.

1 Estimating Return and Risk Chapter 7 Jones, Investments: Analysis and Management.

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 8 Investor Choice: Risk and Reward.

CDA COLLEGE BUS235: PRINCIPLES OF FINANCIAL ANALYSIS Lecture 3 Lecture 3 Lecturer: Kleanthis Zisimos.

Chapter 11 Risk and Rates of Return. Defining and Measuring Risk Risk is the chance that an unexpected outcome will occur A probability distribution is.

1 THE FUTURE: RISK AND RETURN. 2 RISK AND RETURN If the future is known with certainty, all investors will hold assets offering the highest rate of return.

Investments Vicentiu Covrig 1 Return and risk (chapter 2)

1 CHAPTER 2 Risk and Return. 2 Topics in Chapter 2 Basic return measurement Types of Risk addressed in Ch 2: Stand-alone (total) risk Portfolio (market)

2 - 1 Copyright © 2002 by Harcourt College Publishers. All rights reserved. Chapter 2: Risk & Return Learning goals: 1. Meaning of risk 2. Why risk matters.

1 CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model (CAPM)

Risk and Return. Introduction Investment has two aspects: Security Analysis and Portfolio Analysis Security analysis consists of valuation of financial.

Risk and Return Chapter 5. Objectives Understand the relationship between risk and return Define risk and return and show how to measure them by calculating.

4-1 Business Finance (MGT 232) Lecture Risk and Return.

What is risk?. Risk Risk implies the extend to which any chosen action or an inaction that may lead to a loss or some unwanted outcome.

Expected Return and Variance

Risk and Return An Overview

Chapter 2 RISK AND RETURN BASICS.

Risk and Rates of Return

Return, Risk, and the SML RWJ-Chapter 13.

Risk and Return.

Chapter 6 Risk and Rates of Return.

Risk and Return Learning Module.

Chapter 2 RISK AND RETURN BASICS.

Presentation transcript:

1 Investors are concerned with two principal properties inherent in securities: The return that can be expected from holding a security. The risk i.e. the return that is achieved will be less than the return that was expected. Investors want to maximize expected returns subject to their tolerance risk. Basics: Risk and Return

2 Realized returns are after the fact return that was earned. It is a historical data. = Realized Return generated by the ith stock in time period t. Realized Return Vs Expected Return

3 Expected Return on the other hand is our expectation from future. It is the return from an asset that investors anticipate they will earn over future period. It is a predicted return. It may or may not occur. = Expected Return on asset i = Probability of ith state to occur. = Expected Return for the ith stock

4 Arithmetic Mean Vs Geometric Mean Arithmetic Mean The arithmetic average, customarily designated by the symbol X-bar ( ) or the sum of each the values being considered divided by the total number of values.

5 Geometric Mean The geometric average return measures compound, cumulative returns over time. It is used in investments to reflect the realized change in wealth over multiple periods. The geometric average is defined as the nth root of the product resulting from multiplying a series of returns together where: R = total return n = number of periods

6 RISK (Variability in Returns) Systematic RiskUnsystematic Risk

7 Measurement of Risk Standard Deviation The formula for Expected (ex-ante) Where n = a possible outcome X = the expected outcome. P = the probability (or likelihood) of the difference between n and X occurring.

8 Historical (ex-post) = = Realized Return generated by the ith stock in time period t. = Average Return of ith stock.

9 CV = The coefficient of variation shows the risk per unit of return, and it provides a more meaningful basis for comparison when the expected returns on two alternatives are not the same. COEFFICIENT OF VARIATION

10 COEFFICIENT OF VARIATION ProjectsExpected ReturnRiskCV X60%15%25.00% Y8%3%37.50% If we calculate the Coefficient of Variation here, then we find Project Y actually has more risk per unit of return than Project X, in spite of the fact that X's standard deviation is larger. Therefore, even though Project Y has the lower standard deviation, according to the coefficient of variation it is riskier than Project X.

11 Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Therefore, Beta measures non- diversifiable risk. BETA where = Beta of security with market = Covariance between security and market = Variance of market returns