Risk and Return

3521 Words Apr 13th, 2012 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

© 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
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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

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