文档介绍：CHAPTER 2 Risk and Rates of Return
Stand-alone risk
Portfolio risk
Risk & return: CAPM / SML
1
Investment returns
The rate of return on an investment can be calculated as follows:
(Amount received – Amount invested)
Return = ________________________
Amount invested
For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is:
($1,100 - $1,000) / $1,000 = 10%.
2
What is investment risk?
Two types of investment risk
Stand-alone risk
Portfolio risk
Investment risk is related to the probability of earning a low or negative actual return.
The greater the chance of lower than expected or negative returns, the riskier the investment.
3
Probability Distributions
It either will rain, or it will not – only two possible outcomes
4
Probability Distributions
Martin Products and U. S. Electric
5
Probability distributions
A listing of all possible outcomes, and the probability of each occurrence.
Can be shown graphically.
Expected Rate of Return
Rate of
Return (%)
100
15
0
-70
Firm X
Firm Y
6
Investment alternatives
Economy
Prob.
T-Bill
HT
Coll
USR
MP
Recession
%
-%
%
%
-%
Below avg
%
-%
%
-%
%
Average
%
%
%
%
%
Above avg
%
%
-%
%
%
Boom
%
%
-%
%
%
7
Return: Calculating the expected return for each alternative
8
How do the returns of HT and Coll. behave in relation to the market?
HT – Moves with the economy, and has a positive correlation. This is typical.
Coll. – Is countercyclical with the economy, and has a negative correlation. This is unusual.
9
Expected Rate of Return
(1)
(2)
(3)
= (4)
(5)
= (6)
Boom
110%
22%
20%
4%
Normal
22%
11%
16%
8%
Recession
-60%
-18%
10%
3%
k
m
=
15%
k
m
=
15%
State of the
Economy
M