Return, Risk and The Security Market Line - An Introduction to Risk and Return

Whether it is investing, driving or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

Those of us who work hard for every penny we earn have a hard time parting with money. Therefore, people with less*…show more content…*

The variance of a portfolio's return is a function of the variance of the component assets as well as the covariance between each of them. Covariance is a measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. Covariance is closely related to "correlation," wherein the difference between the two is that the latter factors in the standard deviation.

Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative covariance, such as stocks and bonds. This type of diversification is used to reduce risk.

Portfolio variance looks at the covariance or correlation coefficient for the securities in the portfolio. Portfolio

Whether it is investing, driving or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

Those of us who work hard for every penny we earn have a hard time parting with money. Therefore, people with less

The variance of a portfolio's return is a function of the variance of the component assets as well as the covariance between each of them. Covariance is a measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely. Covariance is closely related to "correlation," wherein the difference between the two is that the latter factors in the standard deviation.

Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative covariance, such as stocks and bonds. This type of diversification is used to reduce risk.

Portfolio variance looks at the covariance or correlation coefficient for the securities in the portfolio. Portfolio

Related

- Satisfactory Essays
## Risk and Return

- 3521 Words
- 15 Pages

Chapter 5 Risk and Return 5.1 RATES OF RETURN McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Learning objectives Use data on the past performance of stocks and bonds to characterize the risk and return features of these investments Determine the expected return and risk of portfolios that are constructed by combining risky assets with risk-free investment in Treasury bills Evaluate the performance of a passive strategy McGraw-Hill/Irwin

- 3521 Words
- 15 Pages

Satisfactory Essays - Decent Essays
## Risk & Return

- 2531 Words
- 11 Pages

a. What are investment returns? What is the return on an investment that costs $1,000 and is sold after 1 year for $1,100? Investment returns is the expectation of earning money in the future on the amount of money invested. The return is the financial performance of the investment. The return is the difference between the amount invested and the amount you are returned after said investment. There are two ways to show return on investment. 1. By dollar return. Amount to be received

- 2531 Words
- 11 Pages

Decent Essays - Satisfactory Essays
## Risk and Return

- 1163 Words
- 5 Pages

and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset? a. $0 b. $140 c. $200 d. $320 e. $400 ANALYZING A PORTFOLIO d 59. You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock

- 1163 Words
- 5 Pages

Satisfactory Essays - Decent Essays
## Risk And Return Analysis : Risk

- 1008 Words
- 5 Pages

Risk and Return Analysis Risk has a role in individual’s lives around the world and that role can be influenced by an individual’s character and their daily life. Risk and return is affected by time when investing occurs. Time relates to the amount of time in the market which offers the highest chance of returns. The investment time frame will determine the amount of impact that investors will see, investment choices includes stocks and bonds (Kinicki, Cornett, Adair, Nofsinger, 2016). Risk is when

- 1008 Words
- 5 Pages

Decent Essays - Good Essays
## Risks And Risks Of A Investment Return

- 1124 Words
- 5 Pages

invest their money in the stock exchange. Investment return is the reason that the investors put their money in the stock market. However, when they spend their money in the market, they will come across the risk of the securities. In other words, investors receive the higher investment return which means they will come across the greater risk too. According to Reilly and Brown, risk means the uncertainty of future outcomes. For investors, higher risks might cause their lost more money. The investors

- 1124 Words
- 5 Pages

Good Essays - Better Essays
## Risk and Return Analysis

- 26155 Words
- 105 Pages

1.1 INTRODUCTION Every investment is characterised by return and risk. The concept of risk is intuitively understood by investors. In general, it refers to the possibility of incurring a loss in a financial transaction. But risk involves much more than that. The word ‘risk’ has a definite financial meaning. The possibility of variation of the actual return from the expected return is termed risk. Corporate securities and government securities constitute important

- 26155 Words
- 105 Pages

Better Essays - Decent Essays
## Risk & Return Analysis

- 1000 Words
- 4 Pages

[pic] [pic] Ethan Cromartie Risk & Return Analysis BUS 505 Corporate Finance Certificate of Authorship: I certify that I am the author of this paper and that nay assistance received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any source from which data, words, or ideas either quoted directly or paraphrased has been used. I also certify that this paper was prepared by me specifically for this course Ethan

- 1000 Words
- 4 Pages

Decent Essays - Decent Essays
## The Size And Its Effect On Risk And Return

- 872 Words
- 4 Pages

A large number of studies that deals with size, and its effect on risk and return, have been performed during the past years, and the researchers do still not agree upon this debated subject. The original research on the small-cap premium was done by Rolf Banz. Banz (1981) which concluded that small caps not only grew faster than the S&P 500 over the 1936-1975 periods but that they beat it on a risk-adjusted basis too. This became known as the “small cap effect”. Reingaum later strengthened this

- 872 Words
- 4 Pages

Decent Essays - Better Essays
## Risk And Return Analysis : Notes

- 1158 Words
- 5 Pages

Risk and Return Analysis Paige Riggs University of Phoenix Introduction There are various different financial products that one may choose to invest. Each financial product has its special features. Some of the investments have low risks and thus the return is also low. Others have high risks but offer you high potential returns. Returns are the gains or losses from security in a particular period and are usually quoted as a percentage (Carpenter, 2009). The kind of returns investors

- 1158 Words
- 5 Pages

Better Essays - Good Essays
## Risk and Return Tradeoff Memo

- 1103 Words
- 5 Pages

HEAD: RISK Risk and Return Tradeoff Memo The process of portfolio construction can be quite complex. Analysts go through reams of statistics – past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2009). Every investor aims to maximize returns while minimizing risk. Individual securities must be evaluated not only on the risk-return trade-off in isolation but also on their contribution to the risk-return

- 1103 Words
- 5 Pages

Good Essays