Chapter 4 - Risk and Return

Stand Alone Risk

1. Expected Rate of Return
2. The Standard Deviation of Returns
3. Coefficient of Variation

Risk in a Portfolio Context

1. Portfolio Returns - weighted average of expected returns on the portfolio assets.
2. Portfolio Risk
1. Correlation of returns over time impacts portfolio risk
2. Perfect Correlation - no impact
3. Less than perfect correlation will reduce risk.
3. Diversifiable vs. Market Risk
4. Concept of Beta
5. Portfolio Beta
• Weighted average of individual betas
6. Security Market Line
• =Rf + (Rmkt-Rf)*Beta
• Computing the required (normal)  returns
• Using the SML to evaluate alternatives
• Impact of inflation

Homework