CP
In this chapter, we start from the basic premise that investors like returns and dislike risk. Therefore, people will invest in ...
If at the end of the year you had sold the stock for only $900, your dollar return would have been $100. Although expressing re ...
horses, you are risking your money. If you invest in speculative stocks (or, really, any stock), you are taking a risk in the ho ...
risk, the higher the required rate of return. If you invest in a stock instead of buying a bond, you will again expect to earn a ...
The expected rate of return calculation can also be expressed as an equation that does the same thing as the payoff matrix table ...
calculate expected rates of return as shown previously, and the probabilities and out- comes could be approximated by continuous ...
108 CHAPTER 3 Risk and Return the riskiness of the stock. To calculate the standard deviation, we proceed as shown in Table 3-3, ...
Stand-Alone Risk 109 Square each deviation, then multiply the result by the probability of occurrence for its related outcome, ...
the two distributions were normal, there would be a 68.26 percent probability that Martin’s actual return would be in the range ...
Stand-Alone Risk 111 FIGURE 3-4 Comparison of Probability Distributions and Rates of Return for Projects X and Y 08 60 Probabili ...
of variation captures the effects of both risk and return, it is a better measure for eval- uating risk in situations where inve ...
Stand-Alone Risk 113 The Trade-Off between Risk and Return The table accompanying this box summarizes the historical trade-off b ...
114 CHAPTER 3 Risk and Return Risk in a Portfolio Context In the preceding section, we considered the risk of assets held in iso ...
rˆpw 1 rˆ 1 w 2 rˆ 2 w 3 ˆr 3 w 4 rˆ 4 0.25(12%) 0.25(11.5%) 0.25(10%) 0.25(9.5%) 10.75%. Of course, after the fact and ...
116 CHAPTER 3 Risk and Return FIGURE 3-5 Rate of Return Distributions for Two Perfectly Negatively Correlated Stocks ( 1.0) ...
Risk in a Portfolio Context 117 M ) would move up and down together, and a portfolio consisting of two such stocks would be exac ...
118 CHAPTER 3 Risk and Return Stock M Stock M Portfolio MM Year (M)(M )(p) 1998 (10.0%) (10.0%) (10.0%) 1999 40.0 40.0 40.0 2000 ...
Risk in a Portfolio Context 119 FIGURE 3-7 Rate of Return Distributions for Two Partially Correlated Stocks ( 0.67) and for ...
120 CHAPTER 3 Risk and Return strong and badly when it is weak.^7 Thus, even very large portfolios end up with a substantial amo ...
Risk in a Portfolio Context 121 Thus, almost half of the riskiness inherent in an average individual stock can be eliminated if ...
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