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Risk And Rates Of Return, Lecture Notes - Financial Management

Financial Management

Post: October 12th, 2011
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All Financial Assets Produce CFs, Risk of Asset Depends on Risk of CFs, Stand-alone Risk of Asset’s CFs, Portfolio Risk of CFs , Diversifiable and Market Risk, Risk
All Financial Assets Produce CFs, Risk of Asset Depends on Risk of CFs, Stand-alone Risk of Asset’s CFs, Portfolio Risk of CFs , Diversifiable and Market Risk, Risk
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CHAPTER 8: Risk and Rates of Return Updated: September 20, 2011 All Financial Assets Produce CFs Risk of Asset Depends on Risk of CFs Stand-alone Risk of Asset’s CFs Portfolio Risk of CFs Diversifiable and Market Risk Risk & return: CAPM / SML 8-1 Investment returns The rate of return on an investment can be calculated as follows: Return = (Amount received – Amount invested) ________________________ Amount invested For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%. 8-2 What is investment risk?  Two types of investment risk   Stand-alone risk Portfolio risk    Investment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns, the riskier the investment. Risk = Dispersion of Returns around mean, or expected mean: variance or standard deviation 8-3 Probability dist..

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