Lecture Summary
● Common measures of risk and return
○ Compare different asset classes
● Portfolio risk and return
○ Return as weighted-average return
○ Risk (in most cases) not weighted-average, but dependent on correlation.
● Diversification
○ Market (systematic) and unique (...
Lecture Summary
● Common measures of risk and return
○ Compare different asset classes
● Portfolio risk and return
○ Return as weighted-average return
○ Risk (in most cases) not weighted-average, but dependent on correlation.
● Diversification
○ Market (systematic) and unique (firm-specific) risks.
Return Measures of a Stock
● Holding Period Return (HPR)
● Example: Pt = £100, P0 = £100, Dt = £10, HPR = (110 - 100 + 10)/100 = 20%
● Expected Mean Return: E(r)
● Risk Premium: E(r) - rf
● For simplicity, we don't use E(*)
Total Returns for Different Asset Classes
The value of an investment of $1 in 1925, in real terms.
● Maturity Premium: Extra average return from investing in long-term VS short-term
Treasury securities.
● Risk Premium: Expected return in excess of risk-free return as compensation for
risk.
Measuring Risk
● Standard deviation is the square root of variance. Variance is the average value of
squared deviations from the mean. Variance can only be positive. This is how we
measure risk in finance.
● Variance: Average value of squared deviations from mean. A measure of volatility.
Variance = averaged squared deviations
● Standard Deviation: Square root of variance. Also a measure of volatility.
Standard Deviation (%) = Square root (Variance)
Market Risk (S&P 500, 1871 - 2019)
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller suprajasaravanan. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £3.49. You're not tied to anything after your purchase.
