Contemporary Investments: Chapter 17 Chapter 17 RISK AND DIVERSIFICATION What is risk aversion, and why are investors, as a group, risk averse? What are.

Slides:

Advertisements

Similar presentations

Introduction The relationship between risk and return is fundamental to finance theory You can invest very safely in a bank or in Treasury bills. Why.

Advertisements

Risk Measurement Risk = Actual return deviated from Expected Return = ROIiE(R)

Diversification and Risky Asset Allocation

6 Efficient Diversification Bodie, Kane, and Marcus

F303 Intermediate Investments1 Inside the Optimal Risky Portfolio New Terms: –Co-variance –Correlation –Diversification Diversification – the process of.

Chapter 5 The Mathematics of Diversification

Contemporary Investments: Chapter 2 Chapter 2 FUNDAMENTALS OF RISK AND RETURN What are the sources of investment returns? How are investment returns measured?

Efficient Diversification

INVESTMENTS | BODIE, KANE, MARCUS ©2011 The McGraw-Hill Companies CHAPTER 7 Optimal Risky Portfolios 1.

INVESTMENTS | BODIE, KANE, MARCUS ©2011 The McGraw-Hill Companies CHAPTER 7 Optimal Risky Portfolios 1.

1 VIII. International Diversification. 2 International Diversification 1)The Impact of Exchange Risks 2)Historic Measures of Risk and Return 3)Exchange.

AN INTRODUCTION TO PORTFOLIO MANAGEMENT

QDai for FEUNL Finanças November 2. QDai for FEUNL Topics covered  Minimum variance portfolio  Efficient frontier  Systematic risk vs. Unsystematic.

Chapter 6 An Introduction to Portfolio Management.

SOME STATISTICAL CONCEPTS Chapter 3 Distributions of Data Probability Distribution –Expected Rate of Return –Variance of Returns –Standard Deviation –Covariance.

FIN352 Vicentiu Covrig 1 Risk and Return (chapter 4)

Optimal Risky Portfolios

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

1 Chapter 09 Characterizing Risk and Return McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Portfolio Theory & Capital Asset Pricing Model

AN INTRODUCTION TO PORTFOLIO MANAGEMENT

FIN638 Vicentiu Covrig 1 Portfolio management. FIN638 Vicentiu Covrig 2 How Finance is organized Corporate finance Investments International Finance Financial.

Table 5-1 The expected Return and Standard Deviation of a Portfolio of Colonel Motors and Separated Edison When r = +1 Elton, Gruber, Brown, and Goetzman:

Table 4-1 Elton, Gruber, Brown, and Goetzman: Modern Portfolio Theory and Investment Analysis, Sixth Edition © John Wiley & Sons, Inc.

1 Optimal Risky Portfolio, CAPM, and APT Diversification Portfolio of Two Risky Assets Asset Allocation with Risky and Risk-free Assets Markowitz Portfolio.

11-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

This module identifies the general determinants of common share prices. It begins by describing the relationships between the current price of a security,

Risk Premiums and Risk Aversion

Optimal Risky Portfolios

Optimal Risky Portfolio, CAPM, and APT

Diversification and Portfolio Risk Asset Allocation With Two Risky Assets 6-1.

The Capital Asset Pricing Model (CAPM)

Portfolio Management-Learning Objective

Calculating Expected Return

Risk and Return CHAPTER 5. LEARNING OBJECTIVES  Discuss the concepts of portfolio risk and return  Determine the relationship between risk and return.

Investment Analysis and Portfolio Management Chapter 7.

Risk and Capital Budgeting Chapter 13. Chapter 13 - Outline What is Risk? Risk Related Measurements Coefficient of Correlation The Efficient Frontier.

Return and Risk: The Capital-Asset Pricing Model (CAPM) Expected Returns (Single assets & Portfolios), Variance, Diversification, Efficient Set, Market.

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 5 Risk and Return.

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 7 Bodie, Kane and Marcus)

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

INVESTMENTS | BODIE, KANE, MARCUS Chapter Seven Optimal Risky Portfolios Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or.

Efficient Diversification CHAPTER 6. Diversification and Portfolio Risk Market risk –Systematic or Nondiversifiable Firm-specific risk –Diversifiable.

©2012 McGraw-Hill Ryerson Limited 1 of 31 Learning Objectives 5.Describe and apply the techniques of certainty equivalents, simulation models, sensitivity.

CHAPTER SEVEN Risk, Return, and Portfolio Theory J.D. Han.

Optimal portfolios and index model.  Suppose your portfolio has only 1 stock, how many sources of risk can affect your portfolio? ◦ Uncertainty at the.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 7.

Chapter 7 Expected Return and Risk. Explain how expected return and risk for securities are determined. Explain how expected return and risk for portfolios.

Presentation 2: Objectives  To introduce you with the Principles of Investment Strategy and Modern Portfolio Theory  Topics to be covered  Indifference.

Return and Risk: The Asset-Pricing Model: CAPM and APT.

Chapter 6 Efficient Diversification. E(r p ) = W 1 r 1 + W 2 r 2 W 1 = W 2 = = Two-Security Portfolio Return E(r p ) = 0.6(9.28%) + 0.4(11.97%) = 10.36%

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

Managing Portfolios: Theory

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

Portfolio Analysis Topic 13 I. Markowitz Mean-Variance Analysis.

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 6-1 Chapter 6.

Chapter 6 Efficient Diversification. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. r p = W 1 r 1 + W 2 r 2 W 1 = Proportion.

FIGURE 12-1 Walgreens and Microsoft Stock Prices, 1996–2001 Melicher & Norton/Finance: Introduction to Institutions, Investments, and Management, 11th.

10-0 McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited Corporate Finance Ross  Westerfield  Jaffe Sixth Edition 10 Chapter Ten The Capital Asset.

Class Business Debate #2 Upcoming Groupwork – Spreadsheet Spreadsheet.

Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 11 Diversification and Risky Asset Allocation.

FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 8 RN)

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

Portfolio Diversification Modern Portfolio Theory.

Optimal Risky Portfolios

FIGURE 12.1 Walgreens and Microsoft Stock Prices,

Optimal Risky Portfolios

2. Building efficient portfolios

Optimal Risky Portfolios

Presentation transcript:

Contemporary Investments: Chapter 17 Chapter 17 RISK AND DIVERSIFICATION What is risk aversion, and why are investors, as a group, risk averse? What are the general investment implications of risk aversion? Why is standard deviation a good measure of risk, and how does an investor compute standard deviations for both individual securities and portfolios?

Contemporary Investments: Chapter 17 RISK AND DIVERSIFICATION- Cont. What is the impact of security correlations impact portfolio risk? What are the benefits of diversification, and how investors achieve them? What is the meaning of efficient diversification and modern portfolio theory

Contemporary Investments: Chapter 17 What is risk aversion? Risk aversion Risk aversion and expected returns Relative risk aversion and expected returns

Contemporary Investments: Chapter 17 Figure 17.1 – Distribution of Yearly Returns of Stocks and T-Bills,

Contemporary Investments: Chapter 17 Figure 17.2 – Risk Aversion and Expected Returns

Contemporary Investments: Chapter 17 Measuring risk and return: Individual securities Measuring returns – Ex-ante or expected returns – Ex-post or historical returns Measuring risk –Range –Number of negative outcomes –Standard deviation (or variance)

Contemporary Investments: Chapter 17 Calculating standard deviations and security selection Ex-ante or expected risk Ex-post or historical risk Security selection

Contemporary Investments: Chapter 17 Figure 17.3 – Risk/Return Graph for Security Selection

Contemporary Investments: Chapter 17 Portfolio risk and return Portfolio return. –Ex-ante portfolio return, ER p –Ex-post portfolio return, M p

Contemporary Investments: Chapter 17 Standard deviation of a two-security portfolio Covariance (COV(A,B)) Correlation coefficient CORR(A,B) CORR(A,B) = COV(A,B)/ (SD A )(SD B ) Standard deviation for a two-security portfolio Correlation and portfolio standard deviation

Contemporary Investments: Chapter 17 Figure 17.4 – Two-Security Portfolio Combinations with Various Correlations

Contemporary Investments: Chapter 17 Investment opportunity set for two-security portfolio Minimum variance portfolio Standard Deviation of an N-Security Portfolio.

Contemporary Investments: Chapter 17 Figure 17.5 – Two-Security Portfolio Combinations of Securities A and E

Contemporary Investments: Chapter 17 Diversification Diversification across securities Two types of portfolio risk Mathematical effects of diversification Diversification across time Efficient diversification How to find an efficient frontier Implications for Investors

Contemporary Investments: Chapter 17 Figure 17.6 – Example of Diversification Across Securities

Contemporary Investments: Chapter 17 Figure 17.7 – Efficient Frontier for Three Stocks

Contemporary Investments: Chapter 17 Figure 17.8 – Full-Market Efficient Frontier