Chapter 5 Risk and return 5-1
5-1 Chapter 5 Risk and Return
Risk and return n Defining Risk and return n Using Probability Distributions to Measure risk n Attitudes toward risk o Risk and return in a portfolio context o Diversification n The Capital Asset Pricing Model (CAPM) 5-2
5-2 Risk and Return 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 (CAPM)
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 D t(t P t-1 R Pt-1 5-3
5-3 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. Dt + (Pt - Pt-1 ) Pt-1 R =
Return 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? 1.00+($9.50-510.00) R $1000 5% 5-4
5-4 Return 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? $1.00 + ($9.50 - $10.00 ) $10.00 R = = 5%
Defining Risk The variability of returns from those that are expected. What rate of return do you expect on your investment(savings) this year? What rate will you actually earn? Does it matter if it is a bank cd or a share of stock? 5-5
5-5 Defining Risk What rate of return do you expect on your investment (savings) this year? What rate will you actually earn? Does it matter if it is a bank CD or a share of stock? The variability of returns from those that are expected