Risk and Rates of Return参考.ppt

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Risk and Rates of Return参考

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Breaking Down Sources of Risk Stand-alone risk = Market risk + Diversifiable risk Market risk: portion of a security’s stand-alone risk that cannot be eliminated through diversification. Measured by beta. Diversifiable risk: portion of a security’s stand-alone risk that can be eliminated through proper diversification. 8-* Failure to Diversify If an investor chooses to hold a one-stock portfolio (doesn’t diversify), would the investor be compensated for the extra risk they bear? NO! Stand-alone risk is not important to a well-diversified investor. Rational, risk-averse investors are concerned with σp, which is based upon market risk. There can be only one price (the market return) for a given security. No compensation should be earned for holding unnecessary, diversifiable risk. 8-* Capital Asset Pricing Model (CAPM) Model linking risk and required returns. CAPM suggests that there is a Security Market Line (SML) that states that a stock’s required return equals the risk-free return plus a risk premium that reflects the stock’s risk after diversification. ri = rRF + (rM – rRF)bi Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio. 8-* Beta Measures a stock’s market risk, and shows a stock’s volatility relative to the market. Indicates how risky a stock is if the stock is held in a well-diversified portfolio. 8-* Comments on Beta If beta = 1.0, the security is just as risky as the average stock. If beta 1.0, the security is riskier than average. If beta 1.0, the security is less risky than average. Most stocks have betas in the range of 0.5 to 1.5. 8-* Can the beta of a security be negative? Yes, if the correlation between Stock i and the market is negative (i.e., ρi,m 0). If the correlation is negative, the regression line would slope downward, and the beta would be negative. However, a negative beta is highly

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