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Ken Hartviksen

INTRODUCTION TO

CORPORATE FINANCE

Laurence Booth W. Sean Cleary

Chapter 8 Risk, Return and Portfolio

Theory

CHAPTER 8

Risk, Return and Portfolio

Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 3

Lecture Agenda

Learning Objectives

Important Terms

Measurement of Returns

Measuring Risk

Expected Return and Risk for Portfolios

The Efficient Frontier

Diversification

Summary and Conclusions

Concept Review Questions

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 4

Learning Objectives

The difference among the most important types of returns

How to estimate expected returns and risk for individual

securities

What happens to risk and return when securities are

combined in a portfolio

What is meant by an efficient frontier

Why diversification is so important to investors

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 5

Important Chapter Terms

Arithmetic mean

Attainable portfolios

Capital gain/loss

Correlation coefficient

Covariance

Day trader

Diversification

Efficient frontier

Efficient portfolios

Ex ante returns

Ex post returns

Expected returns

Geometric mean

Income yield

Mark to market

Market risk

Minimum variance frontier

Minimum variance portfolio

Modern portfolio theory

Nave or random diversification

Paper losses

Portfolio

Range

Risk averse

Standard deviation

Total return

Unique (or non-systematic) or

diversifiable risk

Variance

Introduction to Risk and Return

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 7

Introduction to Risk and Return

Risk and return are the two most

important attributes of an

investment.

Research has shown that the two are

linked in the capital markets and

that generally, higher returns can

only be achieved by taking on

greater risk.

Risk isnt just the potential loss of

return, it is the potential loss of the

entire investment itself (loss of

both principal and interest).

Consequently, taking on additional

risk in search of higher returns is

a decision that should not be

taking lightly.

Return

%

RF

Risk

Risk Premium

Real Return

Expected Inflation Rate

Measuring Returns

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 9

Measuring Returns

Introduction

Ex Ante Returns

Return calculations may be done before-the-fact,

in which case, assumptions must be made about the

future

Ex Post Returns

Return calculations done after-the-fact, in order to

analyze what rate of return was earned.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 10

Measuring Returns

Introduction

In Chapter 7 you learned that the constant growth DDM can be

decomposed into the two forms of income that equity investors may

receive, dividends and capital gains.

WHEREAS

Fixed-income investors (bond investors for example) can expect to

earn interest income as well as (depending on the movement of

interest rates) either capital gains or capital losses.

| | | | | | Yield loss) (or Gain Capital Yield Dividend / Income

0

1

+ = +

(

= g

P

D

k

c

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 11

Measuring Returns

Income Yield

Income yield is the return earned in the form of a

periodic cash flow received by investors.

The income yield return is calculated by the periodic

cash flow divided by the purchase price.

Where CF

1

= the expected cash flow to be received

P

0

= the purchase price

yield Income

0

1

P

CF

=

[8-1]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 12

Income Yield

Stocks versus Bonds

Figure 8-1 illustrates the income yields for both bonds and stock in Canada from the

1950s to 2005

The dividend yield is calculated using trailing rather than forecast

earns (because next years dividends cannot be predicted in

aggregate), nevertheless dividend yields have exceeded income

yields on bonds.

Reason risk

The risk of earning bond income is much less than the risk incurred

in earning dividend income.

(Remember, bond investors, as secured creditors of the first have a legally-

enforceable contractual claim to interest.)

(See Figure 8 -1 on the following slide)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 13

Ex post versus Ex ante Returns

Market Income Yields

8-1 FIGURE

Insert Figure 8 - 1

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 14

Measuring Returns

Common Share and Long Canada Bond Yield Gap

Table 8 1 illustrates the income yield gap between stocks and bonds over

recent decades

The main reason that this yield gap has varied so much over time is that the

return to investors is not just the income yield but also the capital gain (or loss)

yield as well.

Average Yield Gap

(%)

1950s 0.82

1960s 2.35

1970s 4.54

1980s 8.14

1990s 5.51

2000s 3.55

Overall 4.58

Table 8-1 Average Yield Gap

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 15

Measuring Returns

Dollar Returns

Investors in market-traded securities (bonds or stock) receive

investment returns in two different form:

Income yield

Capital gain (or loss) yield

The investor will receive dollar returns, for example:

$1.00 of dividends

Share price rise of $2.00

To be useful, dollar returns must be converted to percentage returns as a

function of the original investment. (Because a $3.00 return on a $30

investment might be good, but a $3.00 return on a $300 investment would

be unsatisfactory!)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 16

Measuring Returns

Converting Dollar Returns to Percentage Returns

An investor receives the following dollar returns a stock

investment of $25:

$1.00 of dividends

Share price rise of $2.00

The capital gain (or loss) return component of total return is calculated:

ending price minus beginning price, divided by beginning price

% 8 08 .

$25

$25 - $27

return (loss) gain Capital

0

0 1

= = =

=

P

P P

[8-2]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 17

Measuring Returns

Total Percentage Return

The investors total return (holding period return) is:

% 12 12 . 0 08 . 0 04 . 0

25 $

25 $ 27 $

25 $

00 . 1 $

yield loss) (or gain Capital yield Income return Total

0

0 1

0

1

0

0 1 1

= = + =

(

+

(

=

(

+

(

=

+

=

+ =

P

P P

P

CF

P

P P CF

[8-3]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 18

Measuring Returns

Total Percentage Return General Formula

The general formula for holding period return is:

yield loss) (or gain Capital yield Income return Total

0

0 1

0

1

0

0 1 1

(

+

(

=

+

=

+ =

P

P P

P

CF

P

P P CF

[8-3]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 19

Measuring Average Returns

Ex Post Returns

Measurement of historical rates of return that have

been earned on a security or a class of securities

allows us to identify trends or tendencies that may

be useful in predicting the future.

There are two different types of ex post mean or

average returns used:

Arithmetic average

Geometric mean

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 20

Measuring Average Returns

Arithmetic Average

Where:

r

i

= the individual returns

n = the total number of observations

Most commonly used value in statistics

Sum of all returns divided by the total number of observations

(AM) Average Arithmetic

1

n

r

n

i

i

=

=

[8-4]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 21

Measuring Average Returns

Geometric Mean

Measures the average or compound growth rate

over multiple periods.

1 1 1 1 1 (GM) Mean Geometric

1

3 2 1

- )] r )...( r )( r )( r [(

n

n

+ + + + =

[8-5]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 22

Measuring Average Returns

Geometric Mean versus Arithmetic Average

If all returns (values) are identical the geometric mean =

arithmetic average.

If the return values are volatile the geometric mean < arithmetic

average

The greater the volatility of returns, the greater the difference

between geometric mean and arithmetic average.

(Table 8 2 illustrates this principle on major asset classes 1938 2005)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 23

Measuring Average Returns

Average Investment Returns and Standard Deviations

Annual

Arithmetic

Average (%)

Annual

Geometric

Mean (%)

Standard Deviation

of Annual Returns

(%)

Government of Canada treasury bills 5.20 5.11 4.32

Government of Canada bonds 6.62 6.24 9.32

Canadian stocks 11.79 10.60 16.22

U.S. stocks 13.15 11.76 17.54

Source: Data are from the Canadian Institute of Actuaries

Table 8 - 2 Average Investment Returns and Standard Deviations, 1938-2005

The greater the difference,

the greater the volatility of

annual returns.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 24

Measuring Expected (Ex Ante) Returns

While past returns might be interesting, investors

are most concerned with future returns.

Sometimes, historical average returns will not be

realized in the future.

Developing an independent estimate of ex ante

returns usually involves use of forecasting discrete

scenarios with outcomes and probabilities of

occurrence.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 25

Estimating Expected Returns

Estimating Ex Ante (Forecast) Returns

The general formula

Where:

ER = the expected return on an investment

R

i

= the estimated return in scenario i

Prob

i

= the probability of state i occurring

) Prob ( (ER) Return Expected

1

i

=

=

n

i

i

r

[8-6]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 26

Estimating Expected Returns

Estimating Ex Ante (Forecast) Returns

Example:

This is type of forecast data that are required to make an

ex ante estimate of expected return.

State of the Economy

Probability of

Occurrence

Possible

Returns on

Stock A in that

State

Economic Expansion 25.0% 30%

Normal Economy 50.0% 12%

Recession 25.0% -25%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 27

Estimating Expected Returns

Estimating Ex Ante (Forecast) Returns Using a Spreadsheet Approach

Example Solution:

Sum the products of the probabilities and possible

returns in each state of the economy.

(1) (2) (3) (4)=(2)(1)

State of the Economy

Probability of

Occurrence

Possible

Returns on

Stock A in that

State

Weighted

Possible

Returns on

the Stock

Economic Expansion 25.0% 30% 7.50%

Normal Economy 50.0% 12% 6.00%

Recession 25.0% -25% -6.25%

Expected Return on the Stock = 7.25%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 28

Estimating Expected Returns

Estimating Ex Ante (Forecast) Returns Using a Formula Approach

Example Solution:

Sum the products of the probabilities and possible

returns in each state of the economy.

7.25%

) 25 . 0 (-25% 0.5) (12% .25) 0 (30%

) Prob (r ) Prob (r ) Prob (r

) Prob ( (ER) Return Expected

3 3 2 2 1 1

1

i

=

+ + =

+ + =

=

=

n

i

i

r

Measuring Risk

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 30

Risk

Probability of incurring harm

For investors, risk is the probability of earning an

inadequate return.

If investors require a 10% rate of return on a given

investment, then any return less than 10% is

considered harmful.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 31

Risk

Illustrated

Possible Returns on the Stock

Probability

-30% -20% -10% 0% 10% 20% 30% 40%

Outcomes that produce harm

The range of total possible returns

on the stock A runs from -30% to

more than +40%. If the required

return on the stock is 10%, then

those outcomes less than 10%

represent risk to the investor.

A

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 32

Range

The difference between the maximum and minimum

values is called the range

Canadian common stocks have had a range of

annual returns of 74.36 % over the 1938-2005 period

Treasury bills had a range of 21.07% over the same

period.

As a rough measure of risk, range tells us that

common stock is more risky than treasury bills.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 33

Differences in Levels of Risk

Illustrated

Possible Returns on the Stock

Probability

-30% -20% -10% 0% 10% 20% 30% 40%

Outcomes that produce harm

The wider the range of probable

outcomes the greater the risk of the

investment.

A is a much riskier investment than B B

A

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 34

Historical Returns on Different Asset

Classes

Figure 8-2 illustrates the volatility in annual returns on three

different assets classes from 1938 2005.

Note:

Treasury bills always yielded returns greater than 0%

Long Canadian bond returns have been less than 0% in some

years (when prices fall because of rising interest rates), and the

range of returns has been greater than T-bills but less than

stocks

Common stock returns have experienced the greatest range of

returns

(See Figure 8-2 on the following slide)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 35

Measuring Risk

Annual Returns by Asset Class, 1938 - 2005

FIGURE 8-2

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 36

Refining the Measurement of Risk

Standard Deviation ()

Range measures risk based on only two

observations (minimum and maximum value)

Standard deviation uses all observations.

Standard deviation can be calculated on forecast or

possible returns as well as historical or ex post

returns.

(The following two slides show the two different formula used for Standard

Deviation)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 37

Measuring Risk

Ex post Standard Deviation

1

) (

post Ex

1

2

_

=

=

n

r r

n

i

i

o

[8-7]

ns observatio of number the

year in return the

return average the

deviation standard the

:

_

=

=

=

=

n

i r

r

Where

i

o

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 38

Measuring Risk

Example Using the Ex post Standard Deviation

Problem

Estimate the standard deviation of the historical returns on investment A

that were: 10%, 24%, -12%, 8% and 10%.

Step 1 Calculate the Historical Average Return

Step 2 Calculate the Standard Deviation

% 88 . 12 166

4

664

4

4 0 400 256 4

4

2 0 20 16 2

1 5

) 8 14 ( ) 8 8 ( ) 8 12 ( ) 8 24 ( 8) - (10

1

) (

post Ex

2 2 2 2 2

2 2 2 2 2

1

2

_

= = =

+ + + +

=

+ + +

=

+ + + +

=

=

=

n

r r

n

i

i

o

% 0 . 8

5

40

5

10 8 12 - 24 10

(AM) Average Arithmetic

1

= =

+ + +

= =

=

n

r

n

i

i

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 39

Ex Post Risk

Stability of Risk Over Time

Figure 8-3 (on the next slide) demonstrates that the relative riskiness of

equities and bonds has changed over time.

Until the 1960s, the annual returns on common shares were about four

times more variable than those on bonds.

Over the past 20 years, they have only been twice as variable.

Consequently, scenario-based estimates of risk (standard deviation) is

required when seeking to measure risk in the future. (We cannot safely

assume the future is going to be like the past!)

Scenario-based estimates of risk is done through ex ante estimates and

calculations.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 40

Relative Uncertainty

Equities versus Bonds

FIGURE 8-3

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 41

Measuring Risk

Ex ante Standard Deviation

A Scenario-Based Estimate of Risk

) ( ) (Prob ante Ex

2

1

i i i

n

i

ER r =

=

o

[8-8]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 42

Scenario-based Estimate of Risk

Example Using the Ex ante Standard Deviation Raw Data

State of the

Economy Probability

Possible

Returns on

Security A

Recession 25.0% -22.0%

Normal 50.0% 14.0%

Economic Boom 25.0% 35.0%

GIVEN INFORMATION INCLUDES:

- Possible returns on the investment for different

discrete states

- Associated probabilities for those possible returns

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 43

Scenario-based Estimate of Risk

Ex ante Standard Deviation Spreadsheet Approach

The following two slides illustrate an approach to

solving for standard deviation using a spreadsheet

model.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 44

Scenario-based Estimate of Risk

First Step Calculate the Expected Return

State of the

Economy

Probability

Possible

Returns on

Security A

Weighted

Possible

Returns

Recession 25.0% -22.0% -5.5%

Normal 50.0% 14.0% 7.0%

Economic Boom 25.0% 35.0% 8.8%

Expected Return = 10.3%

Determined by multiplying

the probability times the

possible return.

Expected return equals the sum of

the weighted possible returns.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 45

Scenario-based Estimate of Risk

Second Step Measure the Weighted and Squared Deviations

State of the

Economy Probability

Possible

Returns on

Security A

Weighted

Possible

Returns

Deviation of

Possible

Return from

Expected

Squared

Deviations

Weighted

and

Squared

Deviations

Recession 25.0% -22.0% -5.5% -32.3% 0.10401 0.02600

Normal 50.0% 14.0% 7.0% 3.8% 0.00141 0.00070

Economic Boom 25.0% 35.0% 8.8% 24.8% 0.06126 0.01531

Expected Return = 10.3% Variance = 0.0420

Standard Deviation = 20.50%

Second, square those deviations

from the mean.

The sum of the weighted and square deviations

is the variance in percent squared terms.

The standard deviation is the square root

of the variance (in percent terms).

First calculate the deviation of

possible returns from the expected.

Now multiply the square deviations by

their probability of occurrence.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 46

Scenario-based Estimate of Risk

Example Using the Ex ante Standard Deviation Formula

% 5 . 20 205 .

0420 .

) 06126 (. 25 . ) 00141 (. 5 . ) 10401 (. 25 .

) 8 . 24 ( 25 . ) 8 . 3 ( 5 . ) 3 . 32 ( 25 .

) 3 . 10 35 ( 25 . ) 3 . 10 14 ( 5 . ) 3 . 10 22 ( 25 .

) ( ) ( ) (

) ( ) (Prob ante Ex

2 2 2

2 2 2

2

3 3 1

2

2 2 2

2

1 1 1

2

1

i

= =

=

+ + =

+ + =

+ + =

+ + =

=

=

ER r P ER r P ER r P

ER r

i i

n

i

o

State of the

Economy Probability

Possible

Returns on

Security A

Weighted

Possible

Returns

Recession 25.0% -22.0% -5.5%

Normal 50.0% 14.0% 7.0%

Economic Boom 25.0% 35.0% 8.8%

Expected Return = 10.3%

Modern Portfolio Theory

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 48

Portfolios

A portfolio is a collection of different securities such as stocks and

bonds, that are combined and considered a single asset

The risk-return characteristics of the portfolio is demonstrably

different than the characteristics of the assets that make up that

portfolio, especially with regard to risk.

Combining different securities into portfolios is done to achieve

diversification.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 49

Diversification

Diversification has two faces:

1. Diversification results in an overall reduction in portfolio risk

(return volatility over time) with little sacrifice in returns, and

2. Diversification helps to immunize the portfolio from potentially

catastrophic events such as the outright failure of one of the

constituent investments.

(If only one investment is held, and the issuing firm goes

bankrupt, the entire portfolio value and returns are lost. If a

portfolio is made up of many different investments, the outright

failure of one is more than likely to be offset by gains on others,

helping to make the portfolio immune to such events.)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 50

Expected Return of a Portfolio

Modern Portfolio Theory

The Expected Return on a Portfolio is simply the weighted

average of the returns of the individual assets that make up the

portfolio:

The portfolio weight of a particular security is the percentage of

the portfolios total value that is invested in that security.

) (

n

1 i

=

=

i i p

ER w ER [8-9]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 51

Expected Return of a Portfolio

Example

Portfolio value = $2,000 + $5,000 = $7,000

r

A

= 14%, r

B

= 6%,

w

A

= weight of security A = $2,000 / $7,000 = 28.6%

w

B

= weight of security B = $5,000 / $7,000 = (1-28.6%)= 71.4%

% 288 . 8 % 284 . 4 % 004 . 4

) % 6 (.714 ) % 14 (.286 ) (

n

1 i

= + =

+ = =

=

i i p

ER w ER

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 52

Range of Returns in a Two Asset Portfolio

In a two asset portfolio, simply by changing the weight of the

constituent assets, different portfolio returns can be achieved.

Because the expected return on the portfolio is a simple

weighted average of the individual returns of the assets, you can

achieve portfolio returns bounded by the highest and the lowest

individual asset returns.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 53

Range of Returns in a Two Asset Portfolio

Example 1:

Assume ER

A

= 8% and ER

B

= 10%

(See the following 6 slides based on Figure 8-4)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 54

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

8 - 4 FIGURE

ER

A

=8%

ER

B

=10%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 55

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

8 - 4 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

ER

A

=8%

ER

B

=10%

A portfolio manager can select the relative weights of the two

assets in the portfolio to get a desired return between 8% (100%

invested in A) and 10% (100% invested in B)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 56

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

8 - 4 FIGURE

ER

A

=8%

ER

B

=10%

The potential returns of

the portfolio are

bounded by the highest

and lowest returns of

the individual assets

that make up the

portfolio.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 57

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

8 - 4 FIGURE

ER

A

=8%

ER

B

=10%

The expected return on

the portfolio if 100% is

invested in Asset A is

8%.

% 8 %) 10 )( 0 ( %) 8 )( 0 . 1 ( = + = + =

B B A A p

ER w ER w ER

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 58

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

8 - 4 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

ER

A

=8%

ER

B

=10%

The expected return on

the portfolio if 100% is

invested in Asset B is

10%.

% 10 %) 10 )( 0 . 1 ( %) 8 )( 0 ( = + = + =

B B A A p

ER w ER w ER

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 59

Expected Portfolio Return

Affect on Portfolio Return of Changing Relative Weights in A and B

8 - 4 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Portfolio Weight

10.50

10.00

9.50

9.00

8.50

8.00

7.50

7.00

0 0.2 0.4 0.6 0.8 1.0 1.2

ER

A

=8%

ER

B

=10%

The expected return on

the portfolio if 50% is

invested in Asset A and

50% in B is 9%.

% 9 % 5 % 4

%) 10 )( 5 . 0 ( %) 8 )( 5 . 0 (

= + =

+ =

+ =

B B A A p

ER w ER w ER

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 60

Range of Returns in a Two Asset Portfolio

Example 1:

Assume ER

A

= 14% and ER

B

= 6%

(See the following 2 slides )

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 61

Range of Returns in a Two Asset Portfolio

E(r)

A

= 14%, E(r)

B

= 6%

A graph of this

relationship is

found on the

following slide.

Expected return on Asset A = 14.0%

Expected return on Asset B = 6.0%

Weight of

Asset A

Weight of

Asset B

Expected

Return on the

Portfolio

0.0% 100.0% 6.0%

10.0% 90.0% 6.8%

20.0% 80.0% 7.6%

30.0% 70.0% 8.4%

40.0% 60.0% 9.2%

50.0% 50.0% 10.0%

60.0% 40.0% 10.8%

70.0% 30.0% 11.6%

80.0% 20.0% 12.4%

90.0% 10.0% 13.2%

100.0% 0.0% 14.0%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 62

Range of Returns in a Two Asset Portfolio

E(r)

A

= 14%, E(r)

B

= 6%

Range of Portfolio Returns

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

0

.

0

%

1

0

.

0

%

2

0

.

0

%

3

0

.

0

%

4

0

.

0

%

5

0

.

0

%

6

0

.

0

%

7

0

.

0

%

8

0

.

0

%

9

0

.

0

%

1

0

0

.

0

%

Weight Invested in Asset A

E

x

p

e

c

t

e

d

R

e

t

u

r

n

o

n

T

w

o

A

s

s

e

t

P

o

r

t

f

o

l

i

o

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 63 K. Hartviksen

Expected Portfolio Returns

Example of a Three Asset Portfolio

Relative

Weight

Expected

Return

Weighted

Return

Stock X 0.400 8.0% 0.03

Stock Y 0.350 15.0% 0.05

Stock Z 0.250 25.0% 0.06

Expected Portfolio Return = 14.70%

Risk in Portfolios

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 65

Modern Portfolio Theory - MPT

Prior to the establishment of Modern Portfolio Theory (MPT), most

people only focused upon investment returnsthey ignored risk.

With MPT, investors had a tool that they could use to dramatically

reduce the risk of the portfolio without a significant reduction in the

expected return of the portfolio.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 66

Expected Return and Risk For Portfolios

Standard Deviation of a Two-Asset Portfolio using Covariance

) )( )( ( 2 ) ( ) ( ) ( ) (

,

2 2 2 2

B A B A B B A A p

COV w w w w + + = o o o

[8-11]

Risk of Asset A

adjusted for weight

in the portfolio

Risk of Asset B

adjusted for weight

in the portfolio

Factor to take into

account comovement

of returns. This factor

can be negative.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 67

Expected Return and Risk For Portfolios

Standard Deviation of a Two-Asset Portfolio using Correlation

Coefficient

) )( )( )( )( ( 2 ) ( ) ( ) ( ) (

,

2 2 2 2

B A B A B A B B A A p

w w w w o o o o o + + =

[8-15]

Factor that takes into

account the degree of

comovement of returns.

It can have a negative

value if correlation is

negative.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 68

Grouping Individual Assets into Portfolios

The riskiness of a portfolio that is made of different risky assets is a

function of three different factors:

the riskiness of the individual assets that make up the portfolio

the relative weights of the assets in the portfolio

the degree of comovement of returns of the assets making up the

portfolio

The standard deviation of a two-asset portfolio may be measured

using the Markowitz model:

B A B A B A B B A A p

w w w w o o o o o

,

2 2 2 2

2 + + =

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 69

Risk of a Three-Asset Portfolio

The data requirements for a three-asset portfolio grows

dramatically if we are using Markowitz Portfolio selection formulae.

We need 3 (three) correlation coefficients between A and B; A and

C; and B and C.

A

B C

a,b

b,c

a,c

C A C A C A C B C B C B B A B A B A C C B B A A p

w w w w w w w w w o o o o o o o o o o

, , ,

2 2 2 2 2 2

2 2 2 + + + + + =

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 70

Risk of a Four-asset Portfolio

The data requirements for a four-asset portfolio grows dramatically

if we are using Markowitz Portfolio selection formulae.

We need 6 correlation coefficients between A and B; A and C; A

and D; B and C; C and D; and B and D.

A

C

B D

a,b

a,d

b,c

c,d

a,c

b,d

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 71

Covariance

A statistical measure of the correlation of the

fluctuations of the annual rates of return of

different investments.

) - )( ( Prob

_

,

1

_

, i B i B

n

i

i i A AB

k k k k COV

=

=

[8-12]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 72

Correlation

The degree to which the returns of two stocks co-

move is measured by the correlation coefficient ().

The correlation coefficient () between the returns on

two securities will lie in the range of +1 through - 1.

+1 is perfect positive correlation

-1 is perfect negative correlation

B A

AB

AB

COV

o o

=

[8-13]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 73

Covariance and Correlation Coefficient

Solving for covariance given the correlation

coefficient and standard deviation of the two assets:

B A AB AB

COV o o =

[8-14]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 74

Importance of Correlation

Correlation is important because it affects the degree

to which diversification can be achieved using various

assets.

Theoretically, if two assets returns are perfectly

positively correlated, it is possible to build a riskless

portfolio with a return that is greater than the risk-free

rate.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 75

Affect of Perfectly Negatively Correlated Returns

Elimination of Portfolio Risk

Time 0 1 2

If returns of A and B are

perfectly negatively correlated,

a two-asset portfolio made up

of equal parts of Stock A and B

would be riskless. There would

be no variability

of the portfolios returns over

time.

Returns on Stock A

Returns on Stock B

Returns on Portfolio

Returns

%

10%

5%

15%

20%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 76

Example of Perfectly Positively Correlated Returns

No Diversification of Portfolio Risk

Time 0 1 2

If returns of A and B are

perfectly positively correlated,

a two-asset portfolio made up

of equal parts of Stock A and B

would be risky. There would be

no diversification (reduction of

portfolio risk).

Returns

%

10%

5%

15%

20%

Returns on Stock A

Returns on Stock B

Returns on Portfolio

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 77

Affect of Perfectly Negatively Correlated Returns

Elimination of Portfolio Risk

Time 0 1 2

If returns of A and B are

perfectly negatively correlated,

a two-asset portfolio made up

of equal parts of Stock A and B

would be riskless. There would

be no variability

of the portfolios returns over

time.

Returns

%

10%

Returns on Portfolio

5%

15%

20%

Returns on Stock B

Returns on Stock A

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 78

Affect of Perfectly Negatively Correlated Returns

Numerical Example

Weight of Asset A = 50.0%

Weight of Asset B = 50.0%

Year

Return on

Asset A

Return on

Asset B

Expected

Return on the

Portfolio

xx07 5.0% 15.0% 10.0%

xx08 10.0% 10.0% 10.0%

xx09 15.0% 5.0% 10.0%

Perfectly Negatively

Correlated Returns

over time

% 10 % 5 . 7 % 5 . 2

) % 15 (.5 ) % 5 (.5 ) (

n

1 i

= + =

+ = =

=

i i p

ER w ER

% 10 % 5 . 2 % 5 . 7

) % 5 (.5 ) % 15 (.5 ) (

n

1 i

= + =

+ = =

=

i i p

ER w ER

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 79

Diversification Potential

The potential of an asset to diversify a portfolio is dependent upon

the degree of co-movement of returns of the asset with those other

assets that make up the portfolio.

In a simple, two-asset case, if the returns of the two assets are

perfectly negatively correlated it is possible (depending on the

relative weighting) to eliminate all portfolio risk.

This is demonstrated through the following series of spreadsheets,

and then summarized in graph format.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 80

Example of Portfolio Combinations and

Correlation

Asset

Expected

Return

Standard

Deviation

Correlation

Coefficient

A 5.0% 15.0% 1

B 14.0% 40.0%

Weight of A Weight of B

Expected

Return

Standard

Deviation

100.00% 0.00% 5.00% 15.0%

90.00% 10.00% 5.90% 17.5%

80.00% 20.00% 6.80% 20.0%

70.00% 30.00% 7.70% 22.5%

60.00% 40.00% 8.60% 25.0%

50.00% 50.00% 9.50% 27.5%

40.00% 60.00% 10.40% 30.0%

30.00% 70.00% 11.30% 32.5%

20.00% 80.00% 12.20% 35.0%

10.00% 90.00% 13.10% 37.5%

0.00% 100.00% 14.00% 40.0%

Portfolio Components Portfolio Characteristics

Perfect

Positive

Correlation

no

diversification

Both

portfolio

returns and

risk are

bounded by

the range set

by the

constituent

assets when

=+1

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 81

Example of Portfolio Combinations and

Correlation

Asset

Expected

Return

Standard

Deviation

Correlation

Coefficient

A 5.0% 15.0% 0.5

B 14.0% 40.0%

Weight of A Weight of B

Expected

Return

Standard

Deviation

100.00% 0.00% 5.00% 15.0%

90.00% 10.00% 5.90% 15.9%

80.00% 20.00% 6.80% 17.4%

70.00% 30.00% 7.70% 19.5%

60.00% 40.00% 8.60% 21.9%

50.00% 50.00% 9.50% 24.6%

40.00% 60.00% 10.40% 27.5%

30.00% 70.00% 11.30% 30.5%

20.00% 80.00% 12.20% 33.6%

10.00% 90.00% 13.10% 36.8%

0.00% 100.00% 14.00% 40.0%

Portfolio Components Portfolio Characteristics

Positive

Correlation

weak

diversification

potential

When =+0.5

these portfolio

combinations

have lower

risk

expected

portfolio return

is unaffected.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 82

Example of Portfolio Combinations and

Correlation

Asset

Expected

Return

Standard

Deviation

Correlation

Coefficient

A 5.0% 15.0% 0

B 14.0% 40.0%

Weight of A Weight of B

Expected

Return

Standard

Deviation

100.00% 0.00% 5.00% 15.0%

90.00% 10.00% 5.90% 14.1%

80.00% 20.00% 6.80% 14.4%

70.00% 30.00% 7.70% 15.9%

60.00% 40.00% 8.60% 18.4%

50.00% 50.00% 9.50% 21.4%

40.00% 60.00% 10.40% 24.7%

30.00% 70.00% 11.30% 28.4%

20.00% 80.00% 12.20% 32.1%

10.00% 90.00% 13.10% 36.0%

0.00% 100.00% 14.00% 40.0%

Portfolio Components Portfolio Characteristics

No

Correlation

some

diversification

potential

Portfolio

risk is

lower than

the risk of

either

asset A or

B.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 83

Example of Portfolio Combinations and

Correlation

Asset

Expected

Return

Standard

Deviation

Correlation

Coefficient

A 5.0% 15.0% -0.5

B 14.0% 40.0%

Weight of A Weight of B

Expected

Return

Standard

Deviation

100.00% 0.00% 5.00% 15.0%

90.00% 10.00% 5.90% 12.0%

80.00% 20.00% 6.80% 10.6%

70.00% 30.00% 7.70% 11.3%

60.00% 40.00% 8.60% 13.9%

50.00% 50.00% 9.50% 17.5%

40.00% 60.00% 10.40% 21.6%

30.00% 70.00% 11.30% 26.0%

20.00% 80.00% 12.20% 30.6%

10.00% 90.00% 13.10% 35.3%

0.00% 100.00% 14.00% 40.0%

Portfolio Components Portfolio Characteristics

Negative

Correlation

greater

diversification

potential

Portfolio risk

for more

combinations

is lower than

the risk of

either asset

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 84

Example of Portfolio Combinations and

Correlation

Asset

Expected

Return

Standard

Deviation

Correlation

Coefficient

A 5.0% 15.0% -1

B 14.0% 40.0%

Weight of A Weight of B

Expected

Return

Standard

Deviation

100.00% 0.00% 5.00% 15.0%

90.00% 10.00% 5.90% 9.5%

80.00% 20.00% 6.80% 4.0%

70.00% 30.00% 7.70% 1.5%

60.00% 40.00% 8.60% 7.0%

50.00% 50.00% 9.50% 12.5%

40.00% 60.00% 10.40% 18.0%

30.00% 70.00% 11.30% 23.5%

20.00% 80.00% 12.20% 29.0%

10.00% 90.00% 13.10% 34.5%

0.00% 100.00% 14.00% 40.0%

Portfolio Components Portfolio Characteristics

Perfect

Negative

Correlation

greatest

diversification

potential

Risk of the

portfolio is

almost

eliminated at

70% invested in

asset A

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 85

Diversification of a Two Asset Portfolio

Demonstrated Graphically

The Effect of Correlation on Portfolio Risk:

The Two-Asset Case

Expected Return

Standard Deviation

0%

0% 10%

4%

8%

20% 30% 40%

12%

B

AB

= +1

A

AB

= 0

AB

= -0.5

AB

= -1

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 86

Impact of the Correlation Coefficient

Figure 8-7 (see the next slide) illustrates the

relationship between portfolio risk () and the

correlation coefficient

The slope is not linear a significant amount of

diversification is possible with assets with no

correlation (it is not necessary, nor is it possible to

find, perfectly negatively correlated securities in the

real world)

With perfect negative correlation, the variability of

portfolio returns is reduced to nearly zero.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 87

Expected Portfolio Return

Impact of the Correlation Coefficient

8 - 7 FIGURE

15

10

5

0

S

t

a

n

d

a

r

d

D

e

v

i

a

t

i

o

n

(

%

)

o

f

P

o

r

t

f

o

l

i

o

R

e

t

u

r

n

s

Correlation Coefficient ()

-1 -0.5 0 0.5 1

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 88

Zero Risk Portfolio

We can calculate the portfolio that removes all risk.

When = -1, then

Becomes:

B A p

w w o o o ) 1 ( =

[8-16]

) )( )( )( )( ( 2 ) ( ) ( ) ( ) (

,

2 2 2 2

B A B A B A B B A A p

w w w w o o o o o + + =

[8-15]

An Exercise to Produce the Efficient

Frontier Using Three Assets

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 90

An Exercise using T-bills, Stocks and Bonds

Base Data: Stocks T-bills Bonds

Expected Return(%) 12.73383 6.151702 7.0078723

Standard Deviation (%) 0.168 0.042 0.102

Correlation Coefficient Matrix:

Stocks 1 -0.216 0.048

T-bills -0.216 1 0.380

Bonds 0.048 0.380 1

Portfolio Combinations:

Combination Stocks T-bills Bonds

Expected

Return Variance

Standard

Deviation

1 100.0% 0.0% 0.0% 12.7 0.0283 16.8%

2 90.0% 10.0% 0.0% 12.1 0.0226 15.0%

3 80.0% 20.0% 0.0% 11.4 0.0177 13.3%

4 70.0% 30.0% 0.0% 10.8 0.0134 11.6%

5 60.0% 40.0% 0.0% 10.1 0.0097 9.9%

6 50.0% 50.0% 0.0% 9.4 0.0067 8.2%

7 40.0% 60.0% 0.0% 8.8 0.0044 6.6%

8 30.0% 70.0% 0.0% 8.1 0.0028 5.3%

9 20.0% 80.0% 0.0% 7.5 0.0018 4.2%

10 10.0% 90.0% 0.0% 6.8 0.0014 3.8%

Weights Portfolio

Historical

averages for

returns and risk for

three asset

classes

Historical

correlation

coefficients

between the asset

classes

Portfolio

characteristics for

each combination

of securities

Each achievable

portfolio

combination is

plotted on

expected return,

risk () space,

found on the

following slide.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 91

Achievable Portfolios

Results Using only Three Asset Classes

Attainable Portfolio Combinations

and Efficient Set of Portfolio Combinations

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.0 5.0 10.0 15.0 20.0

Standard Deviation of the Portfolio (%)

P

o

r

t

f

o

l

i

o

E

x

p

e

c

t

e

d

R

e

t

u

r

n

(

%

)

Efficient Set

Minimum Variance

Portf olio

The plotted points are

attainable portfolio

combinations.

The efficient set is that set of

achievable portfolio

combinations that offer the

highest rate of return for a

given level of risk. The solid

blue line indicates the efficient

set.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 92

Achievable Two-Security Portfolios

Modern Portfolio Theory

8 - 9 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Standard Deviation (%)

13

12

11

10

9

8

7

6

0 10 20 30 40 50 60

This line

represents

the set of

portfolio

combinations

that are

achievable by

varying

relative

weights and

using two

non-

correlated

securities.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 93

Dominance

It is assumed that investors are rational, wealth-

maximizing and risk averse.

If so, then some investment choices dominate

others.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 94

Investment Choices

The Concept of Dominance Illustrated

A B

C

Return

%

Risk

10%

5%

To the risk-averse wealth maximizer, the choices are clear, A dominates B,

A dominates C.

A dominates B

because it offers

the same return

but for less risk.

A dominates C

because it offers a

higher return but

for the same risk.

20% 5%

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 95

Efficient Frontier

The Two-Asset Portfolio Combinations

A is not attainable

B,E lie on the

efficient frontier and

are attainable

E is the minimum

variance portfolio

(lowest risk

combination)

C, D are

attainable but are

dominated by

superior portfolios

that line on the line

above E

8 - 10 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Standard Deviation (%)

A

E

B

C

D

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 96

Efficient Frontier

The Two-Asset Portfolio Combinations

8 - 10 FIGURE

E

x

p

e

c

t

e

d

R

e

t

u

r

n

%

Standard Deviation (%)

A

E

B

C

D

Rational, risk

averse

investors will

only want to

hold

portfolios

such as B.

The actual

choice will

depend on

her/his risk

preferences.

Diversification

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 98

Diversification

We have demonstrated that risk of a portfolio can be reduced

by spreading the value of the portfolio across, two, three, four

or more assets.

The key to efficient diversification is to choose assets whose

returns are less than perfectly positively correlated.

Even with random or nave diversification, risk of the portfolio

can be reduced.

This is illustrated in Figure 8 -11 and Table 8 -3 found on the

following slides.

As the portfolio is divided across more and more securities, the risk

of the portfolio falls rapidly at first, until a point is reached where,

further division of the portfolio does not result in a reduction in risk.

Going beyond this point is known as superfluous diversification.

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 99

Diversification

Domestic Diversification

8 - 11 FIGURE

14

12

10

8

6

4

2

0

S

t

a

n

d

a

r

d

D

e

v

i

a

t

i

o

n

(

%

)

Number of Stocks in Portfolio

0 50 100 150 200 250 300

Average Portfolio Risk

January 1985 to December 1997

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 100

Diversification

Domestic Diversification

Number of

Stocks in

Portfolio

Average

Monthly

Portfolio

Return (%)

Standard Deviation

of Average

Monthly Portfolio

Return (%)

Ratio of Portfolio

Standard Deviation to

Standard Deviation of a

Single Stock

Percentage of

Total Achievable

Risk Reduction

1 1.51 13.47 1.00 0.00

2 1.51 10.99 0.82 27.50

3 1.52 9.91 0.74 39.56

4 1.53 9.30 0.69 46.37

5 1.52 8.67 0.64 53.31

6 1.52 8.30 0.62 57.50

7 1.51 7.95 0.59 61.35

8 1.52 7.71 0.57 64.02

9 1.52 7.52 0.56 66.17

10 1.51 7.33 0.54 68.30

14 1.51 6.80 0.50 74.19

40 1.52 5.62 0.42 87.24

50 1.52 5.41 0.40 89.64

100 1.51 4.86 0.36 95.70

200 1.51 4.51 0.34 99.58

222 1.51 4.48 0.33 100.00

Source: Cleary, S. and Copp D. "Diversification with Canadian Stocks: How Much is Enough?" Canadian Investment Review (Fall 1999), Table 1.

Table 8-3 Monthly Canadian Stock Portfolio Returns, January 1985 to December 1997

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 101

Total Risk of an Individual Asset

Equals the Sum of Market and Unique Risk

This graph illustrates

that total risk of a

stock is made up of

market risk (that

cannot be diversified

away because it is a

function of the

economic system)

and unique, company-

specific risk that is

eliminated from the

portfolio through

diversification.

[8-19]

S

t

a

n

d

a

r

d

D

e

v

i

a

t

i

o

n

(

%

)

Number of Stocks in Portfolio

Average Portfolio Risk

Diversifiable

(unique) risk

Nondiversifiable

(systematic) risk

risk ) systematic - (non Unique risk c) (systemati Market risk Total + =

[8-19]

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 102

International Diversification

Clearly, diversification adds value to a portfolio by

reducing risk while not reducing the return on the

portfolio significantly.

Most of the benefits of diversification can be

achieved by investing in 40 50 different positions

(investments)

However, if the investment universe is expanded to

include investments beyond the domestic capital

markets, additional risk reduction is possible.

(See Figure 8 -12 found on the following slide.)

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 103

Diversification

International Diversification

8 - 12 FIGURE

100

80

60

40

20

0

P

e

r

c

e

n

t

r

i

s

k

Number of Stocks

0 10 20 30 40 50 60

International stocks

U.S. stocks

11.7

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 104

Summary and Conclusions

In this chapter you have learned:

How to measure different types of returns

How to calculate the standard deviation and

interpret its meaning

How to measure returns and risk of portfolios and

the importance of correlation in the diversification

process.

How the efficient frontier is that set of achievable

portfolios that offer the highest rate of return for a

given level of risk.

Concept Review Questions

Risk, Return and Portfolio Theory

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 106

Concept Review Question 1

Ex Ante and Ex Post Returns

What is the difference between ex ante and ex post

returns?

CHAPTER 8 Risk, Return and Portfolio Theory 8 - 107

Copyright

Copyright 2007 John Wiley & Sons

Canada, Ltd. All rights reserved.

Reproduction or translation of this work

beyond that permitted by Access

Copyright (the Canadian copyright

licensing agency) is unlawful. Requests

for further information should be

addressed to the Permissions

Department, John Wiley & Sons Canada,

Ltd. The purchaser may make back-up

copies for his or her own use only and

not for distribution or resale. The author

and the publisher assume no

responsibility for errors, omissions, or

damages caused by the use of these files

or programs or from the use of the

information contained herein.

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Отменить можно в любой момент.