tailieunhanh - Lecture note Essentials of corporate finance – Chater 11: Risk and return

After completing this unit, you should be able to: Know how to calculate expected returns, understand the impact of diversification, understand the systematic risk principle, understand the security market line, understand the risk-return trade-off. | 11- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 11- Key Concepts and Skills Know how to calculate expected returns Understand: The impact of diversification The systematic risk principle The security market line and the risk-return trade-off 11- Chapter Outline Expected Returns and Variances Portfolios Announcements, Surprises, and Expected Returns Risk: Systematic and Unsystematic Diversification and Portfolio Risk Systematic Risk and Beta The Security Market Line The SML and the Cost of Capital: A Preview 11- Expected Returns Expected returns are based on the probabilities of possible outcomes Where: pi = the probability of state “i” occurring Ri = the expected return on an asset in state i Return to Quick Quiz 11- Example: Expected Returns 11- Example: Expected Returns 11- Variance and Standard Deviation Variance and standard deviation measure the . | 11- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 11- Key Concepts and Skills Know how to calculate expected returns Understand: The impact of diversification The systematic risk principle The security market line and the risk-return trade-off 11- Chapter Outline Expected Returns and Variances Portfolios Announcements, Surprises, and Expected Returns Risk: Systematic and Unsystematic Diversification and Portfolio Risk Systematic Risk and Beta The Security Market Line The SML and the Cost of Capital: A Preview 11- Expected Returns Expected returns are based on the probabilities of possible outcomes Where: pi = the probability of state “i” occurring Ri = the expected return on an asset in state i Return to Quick Quiz 11- Example: Expected Returns 11- Example: Expected Returns 11- Variance and Standard Deviation Variance and standard deviation measure the volatility of returns Variance = Weighted average of squared deviations Standard Deviation = Square root of variance Return to Quick Quiz 11- Variance & Standard Deviation 11- Portfolios Portfolio = collection of assets An asset’s risk and return impact how the stock affects the risk and return of the portfolio The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets 11- Portfolio Expected Returns The expected return of a portfolio is the weighted average of the expected returns for each asset in the portfolio Weights (wj) = % of portfolio invested in each asset Return to Quick Quiz 11- Example: Portfolio Weights 11- Expected Portfolio Return Alternative Method Steps: Calculate expected portfolio return in each state: Apply the probabilities of each state to the expected return of the portfolio in that state Sum the result of step 2 Return to Slide 11-15