The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. security market line (SML) equation An equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. Capital Asset Pricing Model (CAPM)
Model based upon concept that a stock’s required rate of return is equal to the risk-free rate of return plus a risk premium that reflects the riskiness of the stock after diversification.
Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio.
return of 8.9%3. The geometric average measures the true rate of return while the arithmetic average is simply an average of successive period returns. The distinction can perhaps be made clear by an example. Consider an asset which is purchased for $100 at the beginning of year 1. Suppose the-5- Chapter 8 Risk and Rates of Return Defining and Measuring Risk Stand-alone risk—the risk of an asset held in isolation Risk is the chance that an outcome other than expected will occur A probability distribution is a listing of all possible outcomes with a probability assigned to each— the listing must sum to 100% Chapter 8 Contents Learning Objectives 1. Portfolio Returns and Portfolio Risk 1. Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns to a portfolio of investments. 2. Systematic Risk and the Market Portfolio 8-2 Chapter 8 Contents Learning Objectives 1. Portfolio Returns and Portfolio Risk 1. Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns to a portfolio of investments. 2. Systematic Risk and the Market Portfolio 1. Understand the concept of systematic risk for an 1 CHAPTER 8: RISK AND RATES OF RETURN Learning Objectives 1. Explain the difference between stand-alone risk and risk in a portfolio context. 2. Explain how risk aversion affects a stock’s required rate of return.
25 Aug 2016 the annualized simple rate of return is the geometric mean of the which reflects the risk free rate plus risk premium required to hold risky assets, rs log(1 + Yt,T ), we have the following relationship: pt,T = −(T − t)yt,T ,. (8). 8 2 Apr 1997 credit risk do not rely on the assumption that returns are normally distributed, in Chapter 3 and describe the model in detail in Chapter 8. 22 Jul 2019 The required rate of return (RRR) is the minimum return an investor will accept for an investment as compensation for a given level of risk. RISK AND RATES OF RETURN (Chapter 8) • The Relationship between Risk and Rates of Return—the market risk premium is the return associated with the riskiness of a portfolio that contains all the investments available in the market; it is the return earned by the market in excess of the risk-free rate of return; thus it is
8-2 Chapter 8 Contents Learning Objectives 1. Portfolio Returns and Portfolio Risk 1. Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns to a portfolio of investments. 2. Systematic Risk and the Market Portfolio 1. Understand the concept of systematic risk for an 1 CHAPTER 8: RISK AND RATES OF RETURN Learning Objectives 1. Explain the difference between stand-alone risk and risk in a portfolio context. 2. Explain how risk aversion affects a stock’s required rate of return. PROBLEM 15 (Chapter 8) HR Industries (HRI) has a beta of 1.8, while LR Industries’ (LRI) beta is 0.6. The risk-free rate is 6 percent, and the required rate of return on an average stock is 13 percent. Now, the expected rate of inflation built into rRF falls by 1.5 percentage points, the real risk-free rate remains
Chapter 6. Introduction to Return and Risk. 6-3. • Expected rate of return on an 6-8. Introduction to Return and Risk. Chapter 6. 2. Returns on risky assets can
1 Mar 2014 The CAPM can be divided into two parts: The risk-free rate of return, and the risk premium,. ( ) From. 10 and y losses rs were. CFA 8 ed very total of y move finance In this chapter we will describe the sample data used in. Substituting the portfolio return and the betas in the expected return-beta relationship, we obtain two equations in the unknowns, the risk-free rate and the factor Chapter 5. RISK RETURN –. • Traditionally, when you define return you refer to a Conventions for Quoting Rates of Return: Return on Assets with Regular 8%. Let's start with two extreme cases. 1. If y=1 (all of the portfolio in the risk asset).