Chap 06_Riskreturn_rev.pptVIP

The Trade-off Between Risk and Return Chapter 6 The Trade-off Between Risk and Return The Trade-off Between Risk and Return The Trade-off Between Risk and Return Understanding Returns Dollar Returns Percentage Returns Percentage Returns The History of Returns: Nominal ReturnsThe Value of $1 Invested in Stocks, Treasury Bonds, and Bills The History of Returns: Real ReturnsThe Real Value of $1 Invested in Stocks, Treasury Bonds, and Bills The Risk Dimension Volatility and Risk Average return on stocks is more than double the average return on bonds, but stocks are 2.5 times more volatile. The Distribution of Historical Stock Returns1900 - 2006 The Variability of Stock Returns Variance (?2) – a measure of volatility in units of percent squared Table 6.3 Estimating the Variance of Stock Returns from 1994–2006 Fig. 6.6 The Relationship Between Average (Nominal) Return and Standard Deviation for Stocks, Treasury Bonds, and Bills, 1900 - 2006 Investors who want higher returns have to take more risk. The incremental reward from accepting more risk is constant. The Power of DiversificationAverage Returns and Standard Deviations for 11 Stocks, 1994-2006 The Power of Diversification Annual Returns on Coca-Cola and Wendy’s International The two stocks did not always move in sync. The net effect is that the portfolio is less volatile than either stock held in isolation. Average Returns and Standard Deviations of Portfolios of Stocks and Bonds, 1972 - 2006 The Relationship Between Portfolio Standard Deviation and the Number of Stocks in the Portfolio The risk that diversification eliminates is called unsystematic risk. The risk that remains, even in a diversified portfolio, is called systematic risk. Systematic and Unsystematic Risk Risk and Return Revisited For the various asset classes, a trade-off arises between risk and return. Average Returns and Standard Deviations for 11 Stocks, 1994-2006 Risk and Return Revisited Risk Premiums Around the World The Trade-off Betwee