Principles of Managerial Finance

TABLE 5.13 Summary of Key Definitions and Formulas for Risk and Return

Definitions of variables

bjbeta coefficient or index of nondiversifiable risk for asset j

bpportfolio beta

Ctcash received from the asset investment in the time period t1 to t

CVcoefficient of variation

kexpected value of a return

kjreturn for the jth outcome; return on asset j;required return on asset j

kmmarket return; the return on the market portfolio of assets

kpportfolio return

ktactual, expected, or required rate of return during period t

nnumber of outcomes considered

Ptprice (value) of asset at time t

Pt 1 price (value) of asset at time t 1

Prjprobability of occurrence of the jth outcome

RFrisk-free rate of return

kstandard deviation of returns

wjproportion of total portfolio dollar value represented by asset j

Risk and return formulas

Rate of return during period t:

kt [Eq. 5.1]

Expected value of a return:

for probabilistic data:

k

n

j 1

kjPrj [Eq. 5.2]

general formula:

k



n

j 1

kj

n [Eq. 5.2a]

Standard deviation of return:

for probabilistic data:

k

n

j 1

(kjk)^2 Prj [Eq. 5.3]

general formula:

k



[Eq. 5.3a]



n

j 1

(kjk)^2



n 1

CtPtPt 1



Pt 1

Coefficient of variation:

CV [Eq. 5.4]

Portfolio return:

kp

n

j 1

wjkj [Eq. 5.5]

Total security riskNondiversifiable risk

Diversifiable risk [Eq. 5.6]

Portfolio beta:

bp

n

j 1

wjbj [Eq. 5.7]

Capital asset pricing model

(CAPM):

kjRF[bj(kmRF)] [Eq. 5.8]

k



k

CHAPTER 5 Risk and Return 247