合肥工业大学财务管理原理双语课件Chapter5 risk and return.ppt

chapter 5 Chapter 5: risk and return Study objectives Defining risk and return Using probability distributions to measure risk Attitudes toward risk Risk and return in a portfolio context Diversification The Capital-Asset Pricing Model Efficient Financial Market What does it mean? Risk is like pornography. It’s hard to define, but you know it when you see itJohn Wachowicz 1.Defining Risk and Return The return from holding an investment over some period is simply any cash payments received due to ownership, plus the change in market price, divided by beginning price R=[Dt+(Pt-Pt-1)]/PT-1 Risk: the variability of returns from those that are expected Treasury bill corporate bond common stock risk 2.Using probability distribution to measure risk Probability distribution: a set of possible values that a random variable can assume and their associated probabilities of occurrence Why we use probability distributions to measure risk? 2.1Expected return and standard deviation Expected return: the weighted average of possible returns, with the weights being the probabilities of occurrence Standard deviation is the square root of the variance Illustration of the use of a probability 2.2Use of standard deviation information Assume that we are facing a normal probability distribution of returns. It is symmetrical and bell-shaped 68% of the distribution falls within one standard deviation (right or left) of the expected return 95% falls within 2 standard deviations; over 99% falls within 3 standard deviations 2.2The use of standard deviation It can serve as an absolute measure of return variabilitythe higher the standard deviation, the greater the uncertainty concerning the actual outcome We can use it to determine the likelihood that an actual outcome will be greater or less than a particular amount Example Assume that the return distribution of an investment project is approximately normal with an expected return equal to 9% and a standar