Chapter 1 Investment Analysis and Portfolio Management文档.ppt

1-* Relationship Between Risk and Return Movement along the SML When the risk of an investment changes due to a change in one of its risk sources, the expected return will also change, moving along the SML. Return Risk (business risk, etc., or systematic risk-beta) NRFR SML Expected Movements along the curve that reflect changes in the risk of the asset 1-* Relationship Between Risk and Return Changes in the Slope of the SML When there is a change in the attitude of investors toward risk, the slope of the SML will also change. If investors become more risk averse, then the SML will have a steeper slope, indicating a higher risk premium, RPi, for the same risk level. Risk NRFR Original SML New SML R m R m’ Expected Return 1-* Relationship Between Risk and Return Changes in Market Condition or Inflation A change in the RRFR or the expected rate of inflation will cause a parallel shift in the SML. When nominal risk-free rate increases, the SML will shift up, implying a higher rate of return while still having the same risk premium. Risk NRFR Original SML New SML Expected Return NRFR' 1-* The Internet Investments Online /fin/journal/jofsites.htm * * * * * * * * * * * * * Chapter 1 The Investment Setting What Is An Investment Return and Risk Measures Determinants of Required Returns Relationship between Risk and Return 1-* What Is An Investment? Defining Investment: A current commitment of $ for a period of time in order to derive future payments that will compensate for: The time the funds are committed The expected rate of inflation Uncertainty of future flow of funds Reason for Investing: By investing (saving money now instead of spending it), individuals can tradeoff present consumption for a larger future consumption. 1-* What Is An Investment? Pure Rate of Interest It is the exchange rate between future consumption (future dollars) and present consumption (current dollars). Market forces determine this rate. Example: If you can exchange $100 t