财务管理英文Chapter5.ppt

Chapter 5 Risk and Return Chapter Objectives Defining Risk and Return Calculate the expected return and risk (standard deviation) of both a single asset and a portfolio. Distinguish between systematic and non-systematic risk. Explain the principle of diversification. Explain the capital asset pricing model (CAPM). Explain the security market line (SML). October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February. ---- Mark Twain Defining Return Income received on an investment plus any change in market price, usually expressed as a percent of the beginning market price of the investment. Return Example Example The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share, and shareholders just received a $1 dividend. What return was earned over the past year? Most decisions involve a gamble Probabilities can be known or unknown, and outcomes can be known or unknown Risk -- exists when: Possible outcomes and probabilities are known e.g., Roulette Wheel or Dice Uncertainty -- exists when: Possible outcomes or probabilities are unknown e.g., Drilling for Oil in an unknown field Concepts of Risk Risk-The variability of returns from those that are expected. When probabilities are known, we can analyze risk using probability distributions. Assign a probability to each state of nature, and be exhaustive, so that? ??pi = 1 Expected Return Variance Expected return - the weighted average of the distribution of possible returns in the future. Variance of returns - a measure of the dispersion of the distribution of possible returns. Rational investors like return and dislike risk. The quantification of risk and return is a crucial aspect of modern finance - need to understand the relationship between risk and return in order to make a “good” investment. Discrete vs. Continuous Distributio