《财务管理基础 沈洪涛》ch05.pptVIP

CHAPTER 5Risk and Rates of Return Stand-alone risk Portfolio risk Risk return: CAPM / SML 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%. 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. Probability distributions A listing of all possible outcomes, and the probability of each occurrence. Can be shown graphically. Selected Realized Returns, 1926 – 2001 Average Standard Return Deviation Small-company stocks 17.3% 33.2% Large-company stocks 12.7 20.2 L-T corporate bonds 6.1 8.6 L-T government bonds 5.7 9.4 U.S. Treasury bills 3.9 3.2 Source: Based on Stocks, Bonds, Bills, and Inflation: (Valuation Edition) 2002 Yearbook (Chicago: Ibbotson Associates, 2002), 28. Investment alternatives Why is the T-bill return independent of the economy? Do T-bills promise a completely risk-free return? 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. Return: Calculating the expected return for each alternative Summary of expected returns for all alternatives Exp return HT 17.4% Market 15.0% USR 13.8% T-bill 8.0% Coll. 1.7% HT has the highest expected return, and appears to be the best investment alternative, but is it really? Have we failed to account for ri