Introduction Chapter 1 Risk vs Return 风险管理与金融机构PPT（英文）.pptVIP

Introduction Chapter 1 Risk vs Return There is a trade off between risk and expected return The higher the risk, the higher the expected return Example (Table 1.1, page 2) Suppose Treasuries yield 5% and the returns for an equity investment are: ?0% 0.05 ?0% 0.25 +10% 0.40 +30% 0.25 +50% 0.05 Return Probability Example continued We can characterize investments by their expected return and standard deviation of return For the equity investment: Expected return =10% Standard deviation of return =18.97% Combining Risky Investments (page 5) Efficient Frontier of Risky Investments (Figure 1.3, page 6) Efficient Frontier Expected Return S.D. of Return Investments Efficient Frontier of All Investments (Figure 1.4, page 7) Expected Return S.D. of Return RF E(RM) sM Previous Efficient Frontier F M I J New Efficient Frontier Systematic vs Non-Systematic Risk (equation 1.3, page 9) We can calculate the best fit linear relationship between return from investment and return from market Systematic Risk (non-diversifiable) Non-systematic risk (diversifiable) The Capital Asset Pricing Model (Figure 1.5, page 10) Expected Return E(R) Beta RF E(RM) 1.0 Arbitrage Pricing Theory Returns depend on several factors We can form portfolios to eliminate the dependence on the factors Leads to result that expected return is linearly dependent on the realization of the factors Risk vs Return for Companies If shareholders care only about systematic risk should the same be true of company managers? In practice companies are concerned about total risk Earnings stability and company survival are important managerial objectives 揃ankruptcy costs?arguments show that that managers are acting in the the best interests of shareholders when they consider total risk What Are Bankruptcy Costs? (Business Snapshot 1.1, page 14) Lost sales (There is a reluctance to buy from a bankrupt company.) Key employees leave Legal and accounting costs