CP
122 CHAPTER 3 Risk and Return The Benefits of Diversifying Overseas The size of the global stock market has grown steadily over ...
Risk in a Portfolio Context 123 cannot be eliminated by diversification—those risks related to broad, systematic changes in the ...
Figure 3-9 graphs the relative volatility of three stocks. The data below the graph assume that in 2000 the “market,” defined as ...
in Figure 3-9. The slopes of the lines show how each stock moves in response to a move- ment in the general market—indeed, the s ...
The market risk of a stock is measured by its beta coefficient, which is an index of the stock’s relative volatility. Some benc ...
Calculating Beta Coefficients The CAPM is an ex antemodel, which means that all of the variables represent before- the-fact, exp ...
amount by which Jincreases for a given increase in M. For example, we observe in Figure3-10that Jincreasesfrom8.9to7.1percent( ...
that the higher the correlation coefficient, the closer the points lie to the regression line, and the smaller the errors. In ac ...
beta is about half the 1.0 average beta. Thus, Wal-Mart moves up and down by roughly half the percent as the market. Note, howev ...
investors require to compensate them for bearing that risk? To begin, let us define the following terms: rˆiexpectedrate of ret ...
132 CHAPTER 3 Risk and Return rMrequired rate of return on a portfolio consisting of all stocks, which is called the market por ...
(3-9) rirRF(rMrRF)bi rRF(RPM)bi The required return for Stock i can be written as follows: ri6% (11% 6%)(0.5) 6% 5%(0. ...
134 CHAPTER 3 Risk and Return vertical axis and returns on the market index were shown on the horizontal axis. The slopes of the ...
The Relationship between Risk and Rates of Return 135 The Impact of Inflation As we learned in Chapter 1, interest amounts to “r ...
136 CHAPTER 3 Risk and Return percent, because if there were no risk aversion, there would be no risk premium, and the SML would ...
Physical Assests versus Securities 137 to r 2 6% (5%)2.0 16%. As we shall see in Chapter 5, this change would have a dramatic ...
Some Concerns about Beta and the CAPM The Capital Asset Pricing Model (CAPM) is more than just an abstract theory described in t ...
Now let’s consider stock price volatility as opposed to earnings volatility. Is stock price volatility more likely to imply risk ...
The Security Market Line (SML)equation shows the relationship between a se- curity’s market risk and its required rate of retu ...
Self-Test Problems (Solutions Appear in Appendix A) Stocks A and B have the following historical returns: Year Stock A’s Returns ...
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