Chapter 7 Risk and Portfolio Theory

Expected Return E( r ) = E ( D ) +g P

Risk Total Risk = Systematic Risk + Unsystematic Risk What type of risk does standard deviation measure? What type of risk does variance measure? What type of risk does beta measure?

Return and Risk of a Portfolio r p + = W1 W1 ( r1 r1 ) + W2 W2 ( r2 r2 ) Wp Wp ( rp rp ) S d = { W a 2 S a 2 + W b 2 S b Wa Wa Wb Wb cov ab ) 1/2 cov ab = S a Sb Sb (correlation coefficient of a and b)

Capital Market Line r p = r f + { r m - r f } o p o m

Security Market Line r p = r f + B { rm rm - rf rf }