Monetary Economics Risk and Return, Part 2. Gerald P. Dwyer Fall 2015
|
|
|
- Felicity Henderson
- 5 years ago
- Views:
Transcription
1 Monetary Economics Risk and Return, Part 2 Gerald P. Dwyer Fall 2015
2 Reading Malkiel, Part 2, Part 3 Malkiel, Part 3
3 Outline Returns and risk Overall market risk reduced over longer periods Individual stocks are riskier than the overall market Capital Asset Pricing Model Market risk and idiosyncratic risk Other theories of risk and expected return
4 Overall Market Dividends Reinvested December 31, 1984 to December 31, vwcrspd_
5 Overall Market Price since CRSP Value weighted index with dividends
6 How Reduce Risk? Reduce risk of portfolio What is risk of portfolio? Variability of return on portfolio
7 Variability of Return CRSP Value weighted return with dividends 0.15 dlvwcrspd_
8 Summary Statistics on Return 1984 through 2014 Mean Variance Standard Deviation
9 What Do The Numbers Indicate? The average is the arithmetic average of all the returns ( R R R... R ) / T where R t is a day s return and T is the number of days A return of per day percent per day T Mean Variance Standard Deviation
10 What Do The Numbers Mean? The variance is the average squared deviations of returns around the mean ( R R) ( R R) ( R R)... ( R R) T T where R is the average return The standard deviation is per day, the square root of the variance The standard deviation is 1.1 percent per day Mean Variance Standard Deviation
11 What Do The Numbers Mean? The average return is percent per day Not a lot but it is daily The standard deviation is 1.1 percent per day Very common to find a standard deviation of about 1 percent per day Variability seems quite high Mean Variance Standard Deviation
12 What Do The Numbers Mean? In what sense does a variability of 1 percent per day seem high? On a typical day, it is not surprising to see the overall market index go up or down 1 percent About 1/3 of the days, the market will go up or down more than 1 percent About 5 percent of the days, the market will go up or down more than 2 percent Mean Variance Standard Deviation
13 This Risk Averages Out Over Time 0.15 dlvwretd
14 Variability of Return CRSP Value weighted return with dividends 0.15 dlvwcrspd_
15 Summary Statistics on Return Daily Mean Variance Standard Deviation Monthly Mean Variance Standard Deviation
16 Summary Statistics on Return 1984 to 2014 Daily Mean Variance Standard Deviation Monthly Mean Variance Standard Deviation
17 Summary Statistics on Returns Mean Daily Variance Standard Deviation Monthly Mean Variance Standard Deviation Monthly average return is 19.7 times bigger than daily average return About 0.9 percent per month
18 Summary Statistics on Returns Mean Daily Variance Standard Deviation Monthly Mean Variance Standard Deviation Monthly variance is 16.9 times bigger than daily variance About 0.2 squared percent per month
19 Summary Statistics on Returns Mean Daily Variance Standard Deviation Monthly Mean Variance Standard Deviation Monthly standard deviation is 4.1 times bigger than daily standard deviation About 5.4 percent per month About what would be expected based on formal statistics
20 Summary Statistics on Returns Mean Daily Variance Standard Deviation Monthly Mean Variance Standard Deviation Bottom lines Now have some idea of risk of stocks overall The volatility of returns increases over time but not as fast as the return
21 How Risky Are Individual Stocks? 0.4 Return on Amazon Stock /15/1997 5/15/2001 5/15/2005 5/15/2009 5/15/
22 Variability of Return 0.15 CRSP Value weighted return with dividends
23 Volatility of Amazon s Return in Numbers Amazon Mean Variance Standard Deviation Overall Market (CRSP Index) Mean Variance Standard Deviation The volatility of an individual stock is more than the volatility of the overall market Not surprising
24 Overall Market Return and Amazon The overall market return has less volatility (a lower standard deviation) than Amazon Amazon is an atypical stock but this result holds in general
25 Portfolio is Less Risky The overall market return includes Amazon but it includes many other stocks The volatility of individual stocks is averaged out in the index Just like the volatility of the overall index is reduced by averaging over time from daily to monthly
26 Portfolio is Less Risky The overall market return includes Amazon but it includes many other stocks The volatility of individual stocks is averaged out in the index Just like the volatility of the overall index is reduced by averaging over time from daily to monthly Suppose found a stock that generally has the same return as the market The risk will be greater
27 Capital Asset Pricing Model The basic result in the Capital Asset Pricing Model Return on stock = riskfree rate + risk premium + unsystematic risk What is systematic risk? Systematic risk is risk that is related to overall stock market Unsystematic risk is risk that is not related to the overall stock market Idiosyncratic
28 Systematic Risk Return on stock = riskfree rate + risk premium + unsystematic risk R S is the return on the individual stock r is the riskfree rate R m is the return on the market portfolio R r is the risk premium (systematic risk) is the unsystematic risk S m R r R r S m S
29 Risk and Return reflects the extent to which the return on the individual stock moves with the market The risk premium reflects the comovement of the individual stock with the market Some stocks have betas greater than one Some stocks have betas less than one Some stocks may even have betas that are negative A diversified portfolio of typical stocks will have a beta of one Beta goes to one as the number of stocks increases
30 Beta on Amazon Beta for Amazon greater than one Common to estimate for last 60 months Lots of idiosyncratic movement Return on Amazon Stock CRSP Value weighted return with dividends /15/1997 5/15/2001 5/15/2005 5/15/2009 5/15/
31 Systematic Versus Unsystematic Risk Systematic risk cannot be diversified away The covariation with the market is there For the overall market, beta is one Unsystematic (idiosyncratic) risk can be diversified away If you hold enough stocks, events affecting one firm but not others is unimportant for your portfolio Has virtually no effect on your return
32 Estimate Beta for Amazon Get excess returns I approximate this by daily return on 3 month Treasury bills
33 Daily Return on 3 month Treasury Bills
34 Return Daily Amazon
35 Excess Return Daily Amazon
36 Return CRSP
37 Excess Return CRSP
38 Excess Returns on Amazon and Overall Market
39 Estimate of Beta Estimated Beta is 1.47 over whole period More common for estimating future beta to estimate over last 60 months with monthly data Assume that relationship probably changes over time Just use most recent data
40 Estimated Regression Coefficients: Estimate Std. Error t value Pr(> t ) (Intercept) ** er_crsp < 2e 16 *** Signif. codes: *** ** 0.01 * Residual standard error: on 4150 degrees of freedom (357 observations deleted due to missing values) Multiple R squared: , Adjusted R squared: F statistic: 1036 on 1 and 4150 DF, p value: < 2.2e 16
41 Market Model CAPM R r R r Estimate market model instead S m S R c R S m m S S Estimated coefficient is 1.46 instead of CAPM s 1.47
42 Overall Market Return and Amazon The overall market return has less volatility (a lower standard deviation) than Amazon Amazon is an atypical stock but this result will hold in general
43 Portfolio is Less Risky The overall market return includes Amazon but it includes many other stocks The volatility of individual stocks is averaged out in the index Just like the volatility of the overall index is reduced by averaging over time from daily to monthly
44 Portfolio is Less Risky The overall market return includes Amazon but it includes many other stocks The volatility of individual stocks is averaged out in the index Just like the volatility of the overall index is reduced by averaging over time from daily to monthly Suppose found a stock that generally has the same return as the market The risk will be greater
45 Capital Asset Pricing Model The basic result in the Capital Asset Pricing Model Return on stock = riskfree rate + risk premium + unsystematic risk What is systematic risk? Systematic risk is risk that is related to overall stock market Unsystematic risk is risk that is not related to the overall stock market Idiosyncratic
46 Systematic Risk Return on stock = riskfree rate + risk premium + unsystematic risk R S is the return on the individual stock r is the riskfree rate R m is the return on the market portfolio R r is the risk premium (systematic risk) is the unsystematic risk S m R r R r S m S
47 Risk and Return reflects the extent to which the return on the individual stock moves with the market The risk premium reflects the comovement of the individual stock with the market Some stocks have betas greater than one Some stocks have betas less than one Some stocks may even have betas that are negative A diversified portfolio of typical stocks will have a beta of one Beta goes to one as the number of stocks increases if they are typical
48 Risk and Return reflects the extent to which the return on the individual stock moves with the market The risk premium reflects the comovement of the individual stock with the market Some stocks have betas greater than one Some stocks have betas less than one Some stocks may even have betas that are negative A diversified portfolio will have a beta of one
49 Beta on Amazon Beta for Amazon greater than one Common to estimate for last 60 months Lots of idiosyncratic movement Return on Amazon Stock May 16, 1997 to December 31, Return on CRSP Index May 15, 1997 to December 31, 2012
50 Estimate Beta for Amazon Get excess returns I approximate this by daily return on 3 month Treasury bills
51 Daily Return on 3 month Treasury Bills
52 Return Daily Amazon
53 Excess Return Daily Amazon
54 Return CRSP
55 Excess Return CRSP
56 Excess Returns on Amazon and Overall Market
57 Estimate of Beta Estimated Beta is 1.47 over whole period More common to do over last 60 months Assume that relationship probably changes over time
58 Estimated Regression Coefficients: Estimate Std. Error t value Pr(> t ) (Intercept) ** er_crsp < 2e 16 *** Signif. codes: *** ** 0.01 * Residual standard error: on 4150 degrees of freedom (357 observations deleted due to missing values) Multiple R squared: , Adjusted R squared: F statistic: 1036 on 1 and 4150 DF, p value: < 2.2e 16
59 Market Model CAPM R r R r Estimate market model instead S m S R c R S m m S S Estimated coefficient is 1.46 instead of CAPM s 1.47
60 Systematic Versus Unsystematic Risk Systematic risk cannot be diversified away The covariation with the market is there For the overall market, beta is one Unsystematic (idiosyncratic) risk can be diversified away If you hold enough stocks, what happens to an individual firm is unimportant if it is not related to what happens to other firms Has virtually no effect on your portfolio return
61 Relationship Across Stocks between Beta and Return Riskfree rate of 3 percent, market return of 6 percent Expected Stock Return and Beta Expected return Beta
62 Relationship Between Unsystematic Risk and Return Same data as previous slide Straight line at 6 percent with a beta of one is the underlying relationship Expected return is unaffected by unsystematic risk Expected Stock Return and Unsystematic Risk
63 Beta as a Theory of Risk The Capital Asset Pricing Model has deficiencies It does not good a good job of predicting actual returns using the overall stock market May work better with an overall measure of wealth Still, it is a useful summary of the comovement of a stock return with the market
64 Other Analyses of Risk and Return Arbitrage Pricing Theory (APT) Systematic risk may well reflect other things than just the stock market For example Interest rates Inflation Business cycles (GDP) Fama French Three Factor Pricing Model Theories can consider skewness and other additional characteristics of stocks
65 Other Analyses of Risk and Return Fama French Three Factor Pricing Model Empirical generalization, not a theory Can think of as a particular set of variables in the APT Factors Beta (from the CAPM) Size (total equity market capitalization) Smaller firms are riskier and have higher expected returns Value (ratio of book to market value) Low market value relative to book value is associated with a higher expected return
66 Summary Virtually all of Finance is based on the proposition that people are risk averse Investors must be paid to bear risk Higher risk, higher expected return The volatility of an individual stock reflects Systematic risk Unsystematic risk Unsystematic risk can be diversified away
67 Summary CAPM implies that systematic risk is related to beta of individual stock Expected returns of stock are linearly related to their betas CAPM does not do a particularly good job of predicting average returns across stocks Alternative theories APT Fama French three factor model
Monetary Economics Measuring Asset Returns. Gerald P. Dwyer Fall 2015
Monetary Economics Measuring Asset Returns Gerald P. Dwyer Fall 2015 WSJ Readings Readings this lecture, Cuthbertson Ch. 9 Readings next lecture, Cuthbertson, Chs. 10 13 Measuring Asset Returns Outline
Monetary Economics Portfolios Risk and Returns Diversification and Risk Factors Gerald P. Dwyer Fall 2015
Monetary Economics Portfolios Risk and Returns Diversification and Risk Factors Gerald P. Dwyer Fall 2015 Reading Chapters 11 13, not Appendices Chapter 11 Skip 11.2 Mean variance optimization in practice
CHAPTER 10. Arbitrage Pricing Theory and Multifactor Models of Risk and Return INVESTMENTS BODIE, KANE, MARCUS
CHAPTER 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 10-2 Single Factor Model Returns on
Portfolio Management
Portfolio Management Risk & Return Return Income received on an investment (Dividend) plus any change in market price( Capital gain), usually expressed as a percent of the beginning market price of the
Ch. 8 Risk and Rates of Return. Return, Risk and Capital Market. Investment returns
Ch. 8 Risk and Rates of Return Topics Measuring Return Measuring Risk Risk & Diversification CAPM Return, Risk and Capital Market Managers must estimate current and future opportunity rates of return for
Risk and Return. Nicole Höhling, Introduction. Definitions. Types of risk and beta
Risk and Return Nicole Höhling, 2009-09-07 Introduction Every decision regarding investments is based on the relationship between risk and return. Generally the return on an investment should be as high
CHAPTER 10. Arbitrage Pricing Theory and Multifactor Models of Risk and Return INVESTMENTS BODIE, KANE, MARCUS
CHAPTER 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return INVESTMENTS BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. INVESTMENTS
Chapter 13 Return, Risk, and Security Market Line
1 Chapter 13 Return, Risk, and Security Market Line Konan Chan Financial Management, Spring 2018 Topics Covered Expected Return and Variance Portfolio Risk and Return Risk & Diversification Systematic
Risk and Return and Portfolio Theory
Risk and Return and Portfolio Theory Intro: Last week we learned how to calculate cash flows, now we want to learn how to discount these cash flows. This will take the next several weeks. We know discount
RETURN AND RISK: The Capital Asset Pricing Model
RETURN AND RISK: The Capital Asset Pricing Model (BASED ON RWJJ CHAPTER 11) Return and Risk: The Capital Asset Pricing Model (CAPM) Know how to calculate expected returns Understand covariance, correlation,
Monetary Economics Cost of Capital. Gerald P. Dwyer Fall 2015
Monetary Economics Cost of Capital Gerald P. Dwyer Fall 2015 Cost of Capital Value of firm and capital structure Cost of stock to a firm CAPM Weighted average cost of capital Leverage and risk Modigliani
Testing Capital Asset Pricing Model on KSE Stocks Salman Ahmed Shaikh
Abstract Capital Asset Pricing Model (CAPM) is one of the first asset pricing models to be applied in security valuation. It has had its share of criticism, both empirical and theoretical; however, with
Analysis INTRODUCTION OBJECTIVES
Chapter5 Risk Analysis OBJECTIVES At the end of this chapter, you should be able to: 1. determine the meaning of risk and return; 2. explain the term and usage of statistics in determining risk and return;
COMM 324 INVESTMENTS AND PORTFOLIO MANAGEMENT ASSIGNMENT 1 Due: October 3
COMM 324 INVESTMENTS AND PORTFOLIO MANAGEMENT ASSIGNMENT 1 Due: October 3 1. The following information is provided for GAP, Incorporated, which is traded on NYSE: Fiscal Yr Ending January 31 Close Price
Principles of Finance
Principles of Finance Grzegorz Trojanowski Lecture 7: Arbitrage Pricing Theory Principles of Finance - Lecture 7 1 Lecture 7 material Required reading: Elton et al., Chapter 16 Supplementary reading: Luenberger,
PowerPoint. to accompany. Chapter 11. Systematic Risk and the Equity Risk Premium
PowerPoint to accompany Chapter 11 Systematic Risk and the Equity Risk Premium 11.1 The Expected Return of a Portfolio While for large portfolios investors should expect to experience higher returns for
CHAPTER 2 RISK AND RETURN: Part I
CHAPTER 2 RISK AND RETURN: Part I (Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
Chapter 11. Return and Risk: The Capital Asset Pricing Model (CAPM) Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11 Return and Risk: The Capital Asset Pricing Model (CAPM) McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 11-0 Know how to calculate expected returns Know
P1.T1. Foundations of Risk Management Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th Edition Bionic Turtle FRM Study Notes
P1.T1. Foundations of Risk Management Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th Edition Bionic Turtle FRM Study Notes By David Harper, CFA FRM CIPM www.bionicturtle.com BODIE, CHAPTER
Arbitrage Pricing Theory (APT)
Arbitrage Pricing Theory (APT) (Text reference: Chapter 11) Topics arbitrage factor models pure factor portfolios expected returns on individual securities comparison with CAPM a different approach 1 Arbitrage
Statistically Speaking
Statistically Speaking August 2001 Alpha a Alpha is a measure of a investment instrument s risk-adjusted return. It can be used to directly measure the value added or subtracted by a fund s manager. It
Return and Risk: The Capital-Asset Pricing Model (CAPM)
Return and Risk: The Capital-Asset Pricing Model (CAPM) Expected Returns (Single assets & Portfolios), Variance, Diversification, Efficient Set, Market Portfolio, and CAPM Expected Returns and Variances
FINALTERM EXAMINATION Spring 2009 MGT201- Financial Management (Session - 2) Question No: 1 ( Marks: 1 ) - Please choose one What is the long-run objective of financial management? Maximize earnings per
Define risk, risk aversion, and riskreturn
Risk and 1 Learning Objectives Define risk, risk aversion, and riskreturn tradeoff. Measure risk. Identify different types of risk. Explain methods of risk reduction. Describe how firms compensate for
Models of Asset Pricing
appendix1 to chapter 5 Models of Asset Pricing In Chapter 4, we saw that the return on an asset (such as a bond) measures how much we gain from holding that asset. When we make a decision to buy an asset,
Chapter. Return, Risk, and the Security Market Line. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Return, Risk, and the Security Market Line McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Return, Risk, and the Security Market Line Our goal in this chapter
Homework Assignment Section 3
Homework Assignment Section 3 Tengyuan Liang Business Statistics Booth School of Business Problem 1 A company sets different prices for a particular stereo system in eight different regions of the country.
CHAPTER 2 RISK AND RETURN: PART I
1. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. False Difficulty: Easy LEARNING OBJECTIVES:
Risk and Return. CA Final Paper 2 Strategic Financial Management Chapter 7. Dr. Amit Bagga Phd.,FCA,AICWA,Mcom.
Risk and Return CA Final Paper 2 Strategic Financial Management Chapter 7 Dr. Amit Bagga Phd.,FCA,AICWA,Mcom. Learning Objectives Discuss the objectives of portfolio Management -Risk and Return Phases
For each of the questions 1-6, check one of the response alternatives A, B, C, D, E with a cross in the table below:
November 2016 Page 1 of (6) Multiple Choice Questions (3 points per question) For each of the questions 1-6, check one of the response alternatives A, B, C, D, E with a cross in the table below: Question
Solutions to the problems in the supplement are found at the end of the supplement
www.liontutors.com FIN 301 Exam 2 Chapter 12 Supplement Solutions to the problems in the supplement are found at the end of the supplement Chapter 12 The Capital Asset Pricing Model Risk and Return Higher
Gatton College of Business and Economics Department of Finance & Quantitative Methods. Chapter 13. Finance 300 David Moore
Gatton College of Business and Economics Department of Finance & Quantitative Methods Chapter 13 Finance 300 David Moore Weighted average reminder Your grade 30% for the midterm 50% for the final. Homework
CHAPTER 8 Risk and Rates of Return
CHAPTER 8 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM The basic goal of the firm is to: maximize shareholder wealth! 1 Investment returns The rate of return on an investment
Lecture 5. Return and Risk: The Capital Asset Pricing Model
Lecture 5 Return and Risk: The Capital Asset Pricing Model Outline 1 Individual Securities 2 Expected Return, Variance, and Covariance 3 The Return and Risk for Portfolios 4 The Efficient Set for Two Assets
Final Exam Suggested Solutions
University of Washington Fall 003 Department of Economics Eric Zivot Economics 483 Final Exam Suggested Solutions This is a closed book and closed note exam. However, you are allowed one page of handwritten
Sample Midterm Questions Foundations of Financial Markets Prof. Lasse H. Pedersen
Sample Midterm Questions Foundations of Financial Markets Prof. Lasse H. Pedersen 1. Security A has a higher equilibrium price volatility than security B. Assuming all else is equal, the equilibrium bid-ask
ECO 317 Economics of Uncertainty Fall Term 2009 Tuesday October 6 Portfolio Allocation Mean-Variance Approach
ECO 317 Economics of Uncertainty Fall Term 2009 Tuesday October 6 ortfolio Allocation Mean-Variance Approach Validity of the Mean-Variance Approach Constant absolute risk aversion (CARA): u(w ) = exp(
Diversification. Finance 100
Diversification Finance 100 Prof. Michael R. Roberts 1 Topic Overview How to measure risk and return» Sample risk measures for some classes of securities Brief Statistics Review» Realized and Expected
Measuring the Systematic Risk of Stocks Using the Capital Asset Pricing Model
Journal of Investment and Management 2017; 6(1): 13-21 http://www.sciencepublishinggroup.com/j/jim doi: 10.11648/j.jim.20170601.13 ISSN: 2328-7713 (Print); ISSN: 2328-7721 (Online) Measuring the Systematic
6 Multiple Regression
More than one X variable. 6 Multiple Regression Why? Might be interested in more than one marginal effect Omitted Variable Bias (OVB) 6.1 and 6.2 House prices and OVB Should I build a fireplace? The following
Module 3: Factor Models
Module 3: Factor Models (BUSFIN 4221 - Investments) Andrei S. Gonçalves 1 1 Finance Department The Ohio State University Fall 2016 1 Module 1 - The Demand for Capital 2 Module 1 - The Supply of Capital
CHAPTER 10 SOME LESSONS FROM CAPITAL MARKET HISTORY
CHAPTER 10 SOME LESSONS FROM CAPITAL MARKET HISTORY Answers to Concepts Review and Critical Thinking Questions 3. No, stocks are riskier. Some investors are highly risk averse, and the extra possible return
Monetary Economics Trading, Risk and Return. Gerald P. Dwyer Fall 2015
Monetary Economics Trading, Risk and Return Gerald P. Dwyer Fall 2015 Readings Cuthbertson, Chs. 4 and 5 Next time, Malkiel Part One Trading Venues for trading Exchanges Quote driven Order driven Bid ask
Return, Risk, and the Security Market Line
Chapter 13 Key Concepts and Skills Return, Risk, and the Security Market Line Know how to calculate expected returns Understand the impact of diversification Understand the systematic risk principle Understand
When we model expected returns, we implicitly model expected prices
Week 1: Risk and Return Securities: why do we buy them? To take advantage of future cash flows (in the form of dividends or selling a security for a higher price). How much should we pay for this, considering
BBK34133 Investment Analysis Prepared by Dr Khairul Anuar. L7 Portfolio and Risk Management
BBK34133 Investment Analysis Prepared by Dr Khairul Anuar L7 Portfolio and Risk Management Portfolios A portfolio is a bundle or a combination of individual assets or securities. The portfolio theory provides
The Effect of Kurtosis on the Cross-Section of Stock Returns
Utah State University DigitalCommons@USU All Graduate Plan B and other Reports Graduate Studies 5-2012 The Effect of Kurtosis on the Cross-Section of Stock Returns Abdullah Al Masud Utah State University
Microéconomie de la finance
Microéconomie de la finance 7 e édition Christophe Boucher christophe.boucher@univ-lorraine.fr 1 Chapitre 6 7 e édition Les modèles d évaluation d actifs 2 Introduction The Single-Index Model - Simplifying
Let us assume that we are measuring the yield of a crop plant on 5 different plots at 4 different observation times.
Mixed-effects models An introduction by Christoph Scherber Up to now, we have been dealing with linear models of the form where ß0 and ß1 are parameters of fixed value. Example: Let us assume that we are
Archana Khetan 05/09/ MAFA (CA Final) - Portfolio Management
Archana Khetan 05/09/2010 +91-9930812722 Archana090@hotmail.com MAFA (CA Final) - Portfolio Management 1 Portfolio Management Portfolio is a collection of assets. By investing in a portfolio or combination
FIN Chapter 8. Risk and Return: Capital Asset Pricing Model. Liuren Wu
FIN 3000 Chapter 8 Risk and Return: Capital Asset Pricing Model Liuren Wu Overview 1. Portfolio Returns and Portfolio Risk Calculate the expected rate of return and volatility for a portfolio of investments
ECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Fall 2017 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
Hedge Portfolios, the No Arbitrage Condition & Arbitrage Pricing Theory
Hedge Portfolios, the No Arbitrage Condition & Arbitrage Pricing Theory Hedge Portfolios A portfolio that has zero risk is said to be "perfectly hedged" or, in the jargon of Economics and Finance, is referred
ECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Spring 2018 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
Financial Mathematics III Theory summary
Financial Mathematics III Theory summary Table of Contents Lecture 1... 7 1. State the objective of modern portfolio theory... 7 2. Define the return of an asset... 7 3. How is expected return defined?...
Lecture 10-12: CAPM.
Lecture 10-12: CAPM. I. Reading II. Market Portfolio. III. CAPM World: Assumptions. IV. Portfolio Choice in a CAPM World. V. Minimum Variance Mathematics. VI. Individual Assets in a CAPM World. VII. Intuition
BBK34133 Investment Analysis Prepared by Dr Khairul Anuar. L7 Portfolio and Risk Management
BBK34133 Investment Analysis Prepared by Dr Khairul Anuar L7 Portfolio and Risk Management Portfolios A portfolio is a bundle or a combination of individual assets or securities. The portfolio theory provides
All else equal, people dislike risk.
All else equal, people like returns. All else equal, people dislike risk. On October 7, 07, Home Depot stock closed at $64.. It paid dividends of $0.89 per share on November 9, 07, and $.03 per share on
Further Test on Stock Liquidity Risk With a Relative Measure
International Journal of Education and Research Vol. 1 No. 3 March 2013 Further Test on Stock Liquidity Risk With a Relative Measure David Oima* David Sande** Benjamin Ombok*** Abstract Negative relationship
FNCE 4030 Fall 2012 Roberto Caccia, Ph.D. Midterm_2a (2-Nov-2012) Your name:
Answer the questions in the space below. Written answers require no more than few compact sentences to show you understood and master the concept. Show your work to receive partial credit. Points are as
Risk and Return (Introduction) Professor: Burcu Esmer
Risk and Return (Introduction) Professor: Burcu Esmer 1 Overview Rates of Return: A Review A Century of Capital Market History Measuring Risk Risk & Diversification Thinking About Risk Measuring Market
15.414: COURSE REVIEW. Main Ideas of the Course. Approach: Discounted Cashflows (i.e. PV, NPV): CF 1 CF 2 P V = (1 + r 1 ) (1 + r 2 ) 2
15.414: COURSE REVIEW JIRO E. KONDO Valuation: Main Ideas of the Course. Approach: Discounted Cashflows (i.e. PV, NPV): and CF 1 CF 2 P V = + +... (1 + r 1 ) (1 + r 2 ) 2 CF 1 CF 2 NP V = CF 0 + + +...
Principles of Finance Risk and Return. Instructor: Xiaomeng Lu
Principles of Finance Risk and Return Instructor: Xiaomeng Lu 1 Course Outline Course Introduction Time Value of Money DCF Valuation Security Analysis: Bond, Stock Capital Budgeting (Fundamentals) Portfolio
FIN 6160 Investment Theory. Lecture 7-10
FIN 6160 Investment Theory Lecture 7-10 Optimal Asset Allocation Minimum Variance Portfolio is the portfolio with lowest possible variance. To find the optimal asset allocation for the efficient frontier
CHAPTER 1 AN OVERVIEW OF THE INVESTMENT PROCESS
CHAPTER 1 AN OVERVIEW OF THE INVESTMENT PROCESS TRUE/FALSE 1. The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest. ANS: T 2. An investment
The Capital Asset Pricing Model CAPM: benchmark model of the cost of capital
70391 - Finance The Capital Asset Pricing Model CAPM: benchmark model of the cost of capital 70391 Finance Fall 2016 Tepper School of Business Carnegie Mellon University c 2016 Chris Telmer. Some content
Does Portfolio Theory Work During Financial Crises?
Does Portfolio Theory Work During Financial Crises? Harry M. Markowitz, Mark T. Hebner, Mary E. Brunson It is sometimes said that portfolio theory fails during financial crises because: All asset classes
Answers to Concepts in Review
Answers to Concepts in Review 1. A portfolio is simply a collection of investment vehicles assembled to meet a common investment goal. An efficient portfolio is a portfolio offering the highest expected
CHAPTER III RISK MANAGEMENT
CHAPTER III RISK MANAGEMENT Concept of Risk Risk is the quantified amount which arises due to the likelihood of the occurrence of a future outcome which one does not expect to happen. If one is participating
EQUITY RESEARCH AND PORTFOLIO MANAGEMENT
EQUITY RESEARCH AND PORTFOLIO MANAGEMENT By P K AGARWAL IIFT, NEW DELHI 1 MARKOWITZ APPROACH Requires huge number of estimates to fill the covariance matrix (N(N+3))/2 Eg: For a 2 security case: Require
Adjusting discount rate for Uncertainty
Page 1 Adjusting discount rate for Uncertainty The Issue A simple approach: WACC Weighted average Cost of Capital A better approach: CAPM Capital Asset Pricing Model Massachusetts Institute of Technology
Risk, return, and diversification
Risk, return, and diversification A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Diversification and risk 3. Modern portfolio theory 4. Asset pricing models 5. Summary 1.
Chilton Investment Seminar
Chilton Investment Seminar Palm Beach, Florida - March 30, 2006 Applied Mathematics and Statistics, Stony Brook University Robert J. Frey, Ph.D. Director, Program in Quantitative Finance Objectives Be
Economics 424/Applied Mathematics 540. Final Exam Solutions
University of Washington Summer 01 Department of Economics Eric Zivot Economics 44/Applied Mathematics 540 Final Exam Solutions I. Matrix Algebra and Portfolio Math (30 points, 5 points each) Let R i denote
OPTIMAL RISKY PORTFOLIOS- ASSET ALLOCATIONS. BKM Ch 7
OPTIMAL RISKY PORTFOLIOS- ASSET ALLOCATIONS BKM Ch 7 ASSET ALLOCATION Idea from bank account to diversified portfolio Discussion principles are the same for any number of stocks A. bonds and stocks B.
University 18 Lessons Financial Management. Unit 12: Return, Risk and Shareholder Value
University 18 Lessons Financial Management Unit 12: Return, Risk and Shareholder Value Risk and Return Risk and Return Security analysis is built around the idea that investors are concerned with two principal
Rationale. Learning about return and risk from the historical record and beta estimation. T Bills and Inflation
Learning about return and risk from the historical record and beta estimation Reference: Investments, Bodie, Kane, and Marcus, and Investment Analysis and Behavior, Nofsinger and Hirschey Nattawut Jenwittayaroje,
Index Models and APT
Index Models and APT (Text reference: Chapter 8) Index models Parameter estimation Multifactor models Arbitrage Single factor APT Multifactor APT Index models predate CAPM, originally proposed as a simplification
Chapter 10. Chapter 10 Topics. What is Risk? The big picture. Introduction to Risk, Return, and the Opportunity Cost of Capital
1 Chapter 10 Introduction to Risk, Return, and the Opportunity Cost of Capital Chapter 10 Topics Risk: The Big Picture Rates of Return Risk Premiums Expected Return Stand Alone Risk Portfolio Return and
Foundations of Finance
Lecture 5: CAPM. I. Reading II. Market Portfolio. III. CAPM World: Assumptions. IV. Portfolio Choice in a CAPM World. V. Individual Assets in a CAPM World. VI. Intuition for the SML (E[R p ] depending
CHAPTER 11 RETURN AND RISK: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 11 RETURN AND RISK: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of
Example 1 of econometric analysis: the Market Model
Example 1 of econometric analysis: the Market Model IGIDR, Bombay 14 November, 2008 The Market Model Investors want an equation predicting the return from investing in alternative securities. Return is
(Modern Portfolio Theory Review)
(Modern Portfolio Theory Review) IFS-A76898 Charts 1-9 Reminder: You must include the Modern Portfolio Theory Disclosure pages with all charts you select to use, either individually or as a group. Information
Finance 100: Corporate Finance. Professor Michael R. Roberts Quiz 3 November 8, 2006
Finance 100: Corporate Finance Professor Michael R. Roberts Quiz 3 November 8, 006 Name: Solutions Section ( Points...no joke!): Question Maximum Student Score 1 30 5 3 5 4 0 Total 100 Instructions: Please
Chapter 7. Speculation and Risk in the Foreign Exchange Market Cambridge University Press 7-1
Chapter 7 Speculation and Risk in the Foreign Exchange Market 2018 Cambridge University Press 7-1 7.1 Speculating in the Foreign Exchange Market Uncovered foreign money market investments Kevin Anthony,
Question # 1 of 15 ( Start time: 01:53:35 PM ) Total Marks: 1
MGT 201 - Financial Management (Quiz # 5) 380+ Quizzes solved by Muhammad Afaaq Afaaq_tariq@yahoo.com Date Monday 31st January and Tuesday 1st February 2011 Question # 1 of 15 ( Start time: 01:53:35 PM
Black s Simple Discounting Rule: A Simple Implementation
Black s Simple Discounting Rule: A Simple Implementation March 16, 2008 Abstract We propose a simple implementation of Black s (1988) elegant discounting rule. The rule overcomes thorny problems that traditional
MBF2263 Portfolio Management. Lecture 8: Risk and Return in Capital Markets
MBF2263 Portfolio Management Lecture 8: Risk and Return in Capital Markets 1. A First Look at Risk and Return We begin our look at risk and return by illustrating how the risk premium affects investor
Copyright 2009 Pearson Education Canada
Operating Cash Flows: Sales $682,500 $771,750 $868,219 $972,405 $957,211 less expenses $477,750 $540,225 $607,753 $680,684 $670,048 Difference $204,750 $231,525 $260,466 $291,722 $287,163 After-tax (1
Chapter 13 Return, Risk, and the Security Market Line
Chapter 13 Return, Risk, and the Security Market Line 1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of
Financial Markets. Laurent Calvet. John Lewis Topic 13: Capital Asset Pricing Model (CAPM)
Financial Markets Laurent Calvet calvet@hec.fr John Lewis john.lewis04@imperial.ac.uk Topic 13: Capital Asset Pricing Model (CAPM) HEC MBA Financial Markets Risk-Adjusted Discount Rate Method We need a
State Ownership at the Oslo Stock Exchange. Bernt Arne Ødegaard
State Ownership at the Oslo Stock Exchange Bernt Arne Ødegaard Introduction We ask whether there is a state rebate on companies listed on the Oslo Stock Exchange, i.e. whether companies where the state
Risk and Return: From Securities to Portfolios
FIN 614 Risk and Return 2: Portfolios Professor Robert B.H. Hauswald Kogod School of Business, AU Risk and Return: From Securities to Portfolios From securities individual risk and return characteristics
WEB APPENDIX 8A 7.1 ( 8.9)
WEB APPENDIX 8A CALCULATING BETA COEFFICIENTS The CAPM is an ex ante model, which means that all of the variables represent before-the-fact expected values. In particular, the beta coefficient used in
Theory Appendix to. Idiosyncratic Volatility, Growth Options, and the Cross-Section of Returns. Alexander Barinov
Theory Appendix to Idiosyncratic Volatility, Growth Options, and the Cross-Section of Returns Alexander Barinov Terry College of Business University of Georgia This version: June 2010 Abstract This document
Derivation Of The Capital Asset Pricing Model Part I - A Single Source Of Uncertainty
Derivation Of The Capital Asset Pricing Model Part I - A Single Source Of Uncertainty Gary Schurman MB, CFA August, 2012 The Capital Asset Pricing Model CAPM is used to estimate the required rate of return
The CAPM. (Welch, Chapter 10) Ivo Welch. UCLA Anderson School, Corporate Finance, Winter December 16, 2016
1/1 The CAPM (Welch, Chapter 10) Ivo Welch UCLA Anderson School, Corporate Finance, Winter 2017 December 16, 2016 Did you bring your calculator? Did you read these notes and the chapter ahead of time?
The Norwegian State Equity Ownership
The Norwegian State Equity Ownership B A Ødegaard 15 November 2018 Contents 1 Introduction 1 2 Doing a performance analysis 1 2.1 Using R....................................................................
Portfolio Management
MCF 17 Advanced Courses Portfolio Management Final Exam Time Allowed: 60 minutes Family Name (Surname) First Name Student Number (Matr.) Please answer all questions by choosing the most appropriate alternative
Overview of Concepts and Notation
Overview of Concepts and Notation (BUSFIN 4221: Investments) - Fall 2016 1 Main Concepts This section provides a list of questions you should be able to answer. The main concepts you need to know are embedded