Risk and Return

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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 © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Holding Period Return  The holding period return (HPR)(보유기간수익률)  Depends on the increase (or decrease) in the price of the share over the investment period as well as on any…show more content…
Scenario Analysis and Probability Distributions (시나리오 분석과 확률분포)  How to measure risk with the HPR  Scenario Analysis  Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case  i.e.) Boom, Normal growth, Recession State of the Economy Boom Normal growth Recession Scenario 1 2 3 probability 0.25 0.50 0.25 HPR 44% 14% -16% McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Scenario Analysis and Probability Distributions  Probability distributions  The list of possible HPRs with associated probabilities McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Expected return (기대수익률) • Expected return : The mean value of the distribution of HPR – The sum of Possible returns with associated probabilities E(r) = S pS(s ) r(s ) E (r )   p( s)r ( s) s t 1 p(s) = probability of a state r(s) = return if a state occurs 1 to s states • It is the average of a probability distribution of possible returns, calculated by using the following formula: • E(R)= Sum: probability (in scenario i) * the return (in scenario i) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Measuring Variance or Dispersion of Returns (분산) • Variance : the expected value of the squared deviation