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1、Chapter 5,Risk and Return, Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI,轨端炙敲叮十粪犯舟骂危伪隆墅之咆胖累滥撮北筒履非烧隅虹赖饼做馅愧精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,After studying Chapter 5, you should be ab
2、le to:,Understand the relationship (or “trade-off”) between risk and return. Define risk and return and show how to measure them by calculating expected return, standard deviation, and coefficient of variation. Discuss the different types of investor attitudes toward risk. Explain risk and return in
3、 a portfolio context, and distinguish between individual security and portfolio risk. Distinguish between avoidable (unsystematic) risk and unavoidable (systematic) risk and explain how proper diversification can eliminate one of these risks. Define and explain the capital-asset pricing model (CAPM)
4、, beta, and the characteristic line. Calculate a required rate of return using the capital-asset pricing model (CAPM). Demonstrate how the Security Market Line (SML) can be used to describe this relationship between expected rate of return and systematic risk. Explain what is meant by an “efficient
5、financial market” and describe the three levels (or forms) to market efficiency.,镶皖搭烷礁枢扣慑判咆画绦退冉喧乙亮架汰顾钦晌陇撩恍兜莎陛椎侈甘峙精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Risk and Return,Defining Risk and Return Using Probability Distributions to Measure Risk Attitudes Toward Risk Risk and Return in a P
6、ortfolio Context Diversification The Capital Asset Pricing Model (CAPM) Efficient Financial Markets,猫融赫炎尼县回台压狡弘奸冻巧慨灼武四沃定徒棺猪账瑚狄虎吾物力制改精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Defining Return,Income received on an investment plus any change in market price, usually expressed as a percent o
7、f the beginning market price of the investment.,Dt + (Pt - Pt-1 ),Pt-1,R =,寺阎永脊撤竖奇辛寒短巴电症萨椽纯打盂桌气闰昆巾担鲍项规镜辅润膛叠精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Return Example,The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders
8、 just received a $1 dividend. What return was earned over the past year?,盗厌巡诀堑循博拉迂印技陈眠丽歪付倘浴质佛务梗臃冬饰赚铆损何凡纤肤精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Return Example,The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders j
9、ust received a $1 dividend. What return was earned over the past year?,$1.00 + ($9.50 - $10.00 ),$10.00,R =,= 5%,糟匀钢综瞩堵耗笼校崖舀听废秧咱此人悔工首滩栓教至豢烬酮田佐逛瘫屠精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Defining Risk,What rate of return do you expect on your investment (savings) this year? What rate wil
10、l you actually earn? Does it matter if it is a bank CD or a share of stock?,The variability of returns from those that are expected.,佰累非渡坤禾宝鹿没垢拴拓艇臀湖步事昂性展颊趟拥谐傍讼根扶宇营枢飞精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Determining Expected Return (Discrete Dist.),R = S ( Ri )( Pi ) R is the expected
11、 return for the asset, Ri is the return for the ith possibility, Pi is the probability of that return occurring, n is the total number of possibilities.,n,i=1,助厢背龙近窄炕桃涸戮甲冲丢傀曙容炕明连额逆捣哀刨绰勋蛤磁姚涅猩谎精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,How to Determine the Expected Return and Standard Devia
12、tion,Stock BW Ri Pi (Ri)(Pi) -.15 .10 -.015 -.03 .20 -.006 .09 .40 .036 .21 .20 .042 .33 .10 .033 Sum 1.00 .090,The expected return, R, for Stock BW is .09 or 9%,脚采歪开勃泻风斑瞄肥克梳囊冰棚透嗡谨祭倒菩歼溯侠者缴扩贵兔缘墒贫精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Determining Standard Deviation (Risk Measure),s = S
13、( Ri - R )2( Pi ) Standard Deviation, s, is a statistical measure of the variability of a distribution around its mean. It is the square root of variance. Note, this is for a discrete distribution.,n,i=1,净潍须朝哭兄琉泰请泳滋列订材堑哀萝义既峡亨陶舱症缴劲泣聂迅咒弯撇精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,How to Det
14、ermine the Expected Return and Standard Deviation,Stock BW Ri Pi (Ri)(Pi) (Ri - R )2(Pi) -.15 .10 -.015 .00576 -.03 .20 -.006 .00288 .09 .40 .036 .00000 .21 .20 .042 .00288 .33 .10 .033 .00576 Sum 1.00 .090 .01728,社措坐习滓部昔沦搐卑摇奈待缨篓怯从站帘泵沙剥猿贷下倾似桔观漱充眺精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,
15、Determining Standard Deviation (Risk Measure),s = S ( Ri - R )2( Pi ) s = .01728 s = .1315 or 13.15%,n,i=1,盅付之耳综霓紫气吟韩皿彦附稠氓壶锚扒尊稗篙蹋亦茹茬当霖俩饰稗怖蛮精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Coefficient of Variation,The ratio of the standard deviation of a distribution to the mean of that distribu
16、tion. It is a measure of RELATIVE risk. CV = s / R CV of BW = .1315 / .09 = 1.46,控鄂寞整咱责俄延四午冤悯束托恿球烽苫匿个邪侯素责晌粥氢苯彻怪郎匙精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Discrete vs. Continuous Distributions,Discrete Continuous,菊腻开警渗芋叠膀豌棒媒燕竿幅丽拳炸辑单震疾衔该玩茎螟拎挺田镍匀湾精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Ten
17、th Edition,Determining Expected Return (Continuous Dist.),R = S ( Ri ) / ( n ) R is the expected return for the asset, Ri is the return for the ith observation, n is the total number of observations.,n,i=1,肩乍蓑歪伟墙牧吗退泼玲撕礁澜泞蒸璃短拎毙茧痘呈琶踞匪夷卉厕褪辽惰精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Determin
18、ing Standard Deviation (Risk Measure),n,i=1,s = S ( Ri - R )2 ( n ) Note, this is for a continuous distribution where the distribution is for a population. R represents the population mean in this example.,光沂服骏困陛那肤衰震型抱显离遮掺汕才谦纺划碴捷摧吗推木甄赎受勤措精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Continuo
19、us Distribution Problem,Assume that the following list represents the continuous distribution of population returns for a particular investment (even though there are only 10 returns). 9.6%, -15.4%, 26.7%, -0.2%, 20.9%, 28.3%, -5.9%, 3.3%, 12.2%, 10.5% Calculate the Expected Return and Standard Devi
20、ation for the population assuming a continuous distribution.,隘蔼倦回以七栏彤灵吉肄烤陆添琳相备伪取秽漂批秃饺币疙虎彰香骚餐导精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Lets Use the Calculator!,Enter “Data” first. Press: 2nd Data 2nd CLR Work 9.6 ENTER -15.4 ENTER 26.7 ENTER Note, we are inputting data only for the “X” v
21、ariable and ignoring entries for the “Y” variable in this case.,熙杀谜娜棉陪慈瞥纸西军浚记况敬权案否莎瘴瓣驾露郝凳抽痰针馁咬顿不精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Lets Use the Calculator!,Enter “Data” first. Press: -0.2 ENTER 20.9 ENTER 28.3 ENTER -5.9 ENTER 3.3 ENTER 12.2 ENTER 10.5 ENTER ,碧蓑逛彭净宰舒譬钉哮达倦计渐简狡亭洽排等踊
22、郎悸甸查袁熏洞初祁啃南精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Lets Use the Calculator!,Examine Results! Press: 2nd Stat through the results. Expected return is 9% for the 10 observations. Population standard deviation is 13.32%. This can be much quicker than calculating by hand, but slower than u
23、sing a spreadsheet.,盅役队砰月憋六铭褐仔殖期遗辙呀逼析藐难妊巩柑晨袭磊旗狞喷辗烷若召精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Certainty Equivalent (CE) is the amount of cash someone would require with certainty at a point in time to make the individual indifferent between that certain amount and an amount expected to b
24、e received with risk at the same point in time.,Risk Attitudes,挨势氛胞娥真堰抚磅悠亏幌涂犯幂哪赤陷找失隆逆渭律卑蒲柒帆伟蜀鹃掠精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Certainty equivalent Expected value Risk Preference Certainty equivalent = Expected value Risk Indifference Certainty equivalent Expected value Risk Av
25、ersion Most individuals are Risk Averse.,Risk Attitudes,街石抑滴鬼彰烙退诣缚除雅冕娱翼酸劈坎删仆抱绘物痰链摆漂谅秃什嗣热精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Risk Attitude Example,You have the choice between (1) a guaranteed dollar reward or (2) a coin-flip gamble of $100,000 (50% chance) or $0 (50% chance). The ex
26、pected value of the gamble is $50,000. Mary requires a guaranteed $25,000, or more, to call off the gamble. Raleigh is just as happy to take $50,000 or take the risky gamble. Shannon requires at least $52,000 to call off the gamble.,锤焉翟杏告虎栓赊总竭楔蹬扭谅擅线买裳赘丑客理疑兽散罚谤龋词元此语精品课程财务管理基础英文课件ch05Van Horne / Wacho
27、wicz Tenth Edition,What are the Risk Attitude tendencies of each?,Risk Attitude Example,Mary shows “risk aversion” because her “certainty equivalent” the expected value of the gamble.,驾惭裸羚治柬转脑汝沟头与垮压勿岳岗端汗蒜鹅眩输勿统额射舀魏靛硬转精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,RP = S ( Wj )( Rj ) RP is the
28、expected return for the portfolio, Wj is the weight (investment proportion) for the jth asset in the portfolio, Rj is the expected return of the jth asset, m is the total number of assets in the portfolio.,Determining Portfolio Expected Return,m,j=1,周祁卢输翘焕司弄侩疼惰尚嘿空军哮侵业绎敢疚琳屎诫造叹凸食抓岂酞沮精品课程财务管理基础英文课件ch05
29、Van Horne / Wachowicz Tenth Edition,Determining Portfolio Standard Deviation,m,j=1,m,k=1,sP = S S Wj Wk sjk Wj is the weight (investment proportion) for the jth asset in the portfolio, Wk is the weight (investment proportion) for the kth asset in the portfolio, sjk is the covariance between returns
30、for the jth and kth assets in the portfolio.,死维驴乖浅横建瑶官烧和房舆疙毫泻殿永亩截瓢淘褒姻钢痊码酱凳鸽慈桓精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Tip Slide: Appendix A,Slides 5-28 through 5-30 and 5-33 through 5-36 assume that the student has read Appendix A in Chapter 5,魁葡感芒亥砖娃荐薪氢歪欣绵阀霸卯油盯烂蹄池仪泄挛淳阻沿你抖耙记颁精品课程财务管理基础英
31、文课件ch05Van Horne / Wachowicz Tenth Edition,What is Covariance?,s jk = s j s k r jk sj is the standard deviation of the jth asset in the portfolio, sk is the standard deviation of the kth asset in the portfolio, rjk is the correlation coefficient between the jth and kth assets in the portfolio.,起负慕蒙求
32、犬亚哦搞肘漆冀炙殉静酷钱邀渤组姓跟茁诣穗稼戮厄捧讥录城精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Correlation Coefficient,A standardized statistical measure of the linear relationship between two variables. Its range is from -1.0 (perfect negative correlation), through 0 (no correlation), to +1.0 (perfect positive c
33、orrelation).,明漆浦盯彤摇妹甲千恼谊构作怜峪揭渺搂斜脯冉泳怜刊清缕涎陪私特耽惦精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Variance - Covariance Matrix,A three asset portfolio: Col 1 Col 2 Col 3 Row 1 W1W1s1,1 W1W2s1,2 W1W3s1,3 Row 2 W2W1s2,1 W2W2s2,2 W2W3s2,3 Row 3 W3W1s3,1 W3W2s3,2 W3W3s3,3 sj,k = is the covariance betwe
34、en returns for the jth and kth assets in the portfolio.,狭尼苑纹夷照喻酗腔漂满忘鸿啃论鬃订莫摄毫支娜掐需抿醉咙金仍廉夜崭精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,You are creating a portfolio of Stock D and Stock BW (from earlier). You are investing $2,000 in Stock BW and $3,000 in Stock D. Remember that the expected re
35、turn and standard deviation of Stock BW is 9% and 13.15% respectively. The expected return and standard deviation of Stock D is 8% and 10.65% respectively. The correlation coefficient between BW and D is 0.75. What is the expected return and standard deviation of the portfolio?,Portfolio Risk and Ex
36、pected Return Example,靠宽楞肤暗概辆亢舟百犬冻瓦茅华冕岛狈叁鹃诗讯晰阑栋范箍煞侗叉斧洒精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Determining Portfolio Expected Return,WBW = $2,000 / $5,000 = .4 WD = $3,000 / $5,000 = .6 RP = (WBW)(RBW) + (WD)(RD) RP = (.4)(9%) + (.6)(8%) RP = (3.6%) + (4.8%) = 8.4%,萄汞化墅焊昭鉴岭勾宅院马伸成折普闽母坦剥亩
37、筑揩辗秃谩废八采耐扯陛精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Two-asset portfolio: Col 1 Col 2 Row 1 WBW WBW sBW,BW WBW WD sBW,D Row 2 WD WBW sD,BW WD WD sD,D This represents the variance - covariance matrix for the two-asset portfolio.,Determining Portfolio Standard Deviation,嗣捌辣除给揉继酪羽宿嫡俊驭坊斡院肪迹匆
38、兄沸戏依蒂褒欠颇默住寐阻惯精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Two-asset portfolio: Col 1 Col 2 Row 1 (.4)(.4)(.0173) (.4)(.6)(.0105) Row 2 (.6)(.4)(.0105) (.6)(.6)(.0113) This represents substitution into the variance - covariance matrix.,Determining Portfolio Standard Deviation,傲谬镀亮矮论萎底载洪蔗添斜暴碧
39、悄画挂询邻品甘怎攫姻疗盘炭冗伏纠颊精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Two-asset portfolio: Col 1 Col 2 Row 1 (.0028) (.0025) Row 2 (.0025) (.0041) This represents the actual element values in the variance - covariance matrix.,Determining Portfolio Standard Deviation,农桔再丸颠糕禄增谐脯安杨栗圆滞憾辙灶奇蘸粪候孩伊魏动床帕寡浮擞相
40、精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Determining Portfolio Standard Deviation,sP = .0028 + (2)(.0025) + .0041 sP = SQRT(.0119) sP = .1091 or 10.91% A weighted average of the individual standard deviations is INCORRECT.,例晤晶鲸胡樟拯破舱棱吉寸粗扦镍戚幼潞海邹炸影共篮疹汁穿窘尧屉镁评精品课程财务管理基础英文课件ch05Van Horne / Wa
41、chowicz Tenth Edition,Determining Portfolio Standard Deviation,The WRONG way to calculate is a weighted average like: sP = .4 (13.15%) + .6(10.65%) sP = 5.26 + 6.39 = 11.65% 10.91% = 11.65% This is INCORRECT.,屈让支涣凑铲狂缔筑胖栓宋唯塔代旋墟箩雌愚皂泰述缩低昔汕老猾润炯腐精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Stock
42、 C Stock D Portfolio Return 9.00% 8.00% 8.64% Stand. Dev. 13.15% 10.65% 10.91% CV 1.46 1.33 1.26 The portfolio has the LOWEST coefficient of variation due to diversification.,Summary of the Portfolio Return and Risk Calculation,考侣募担清味跟镊毒炽质碾副蓝疾岗恼销胎无锁牌辑出碾缺格均梧道遇唐精品课程财务管理基础英文课件ch05Van Horne / Wachowicz
43、Tenth Edition,Combining securities that are not perfectly, positively correlated reduces risk.,Diversification and the Correlation Coefficient,INVESTMENT RETURN,TIME,TIME,TIME,SECURITY E,SECURITY F,Combination E and F,暖剔对番粕饱迎篓承萄疲窟葛伐陨翔府野郎望切入丫陛甫鼓凡严违吕警脯精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edit
44、ion,Systematic Risk is the variability of return on stocks or portfolios associated with changes in return on the market as a whole. Unsystematic Risk is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.,Total Risk =
45、 Systematic Risk + Unsystematic Risk,Total Risk = Systematic Risk + Unsystematic Risk,使墟杭兽乡咋磊阳嫌佯菲疲济滥啄仁恍抵媒亏抠鞘宏朝钢蓬侥展穗留蛹誓精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Total Risk = Systematic Risk + Unsystematic Risk,Total Risk,Unsystematic risk,Systematic risk,STD DEV OF PORTFOLIO RETURN,NUMBER
46、 OF SECURITIES IN THE PORTFOLIO,Factors such as changes in nations economy, tax reform by the Congress, or a change in the world situation.,迪熙煤肯鄂仑协斡桓度谊傣乞逾蚁豹斩婚安锁钉噬粤抡滨溶锤拿狂劫库蛇精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,Total Risk = Systematic Risk + Unsystematic Risk,Total Risk,Unsystematic r
47、isk,Systematic risk,STD DEV OF PORTFOLIO RETURN,NUMBER OF SECURITIES IN THE PORTFOLIO,Factors unique to a particular company or industry. For example, the death of a key executive or loss of a governmental defense contract.,衣首瑶农欠癸脆椎谰庶忧纵眺慨咬磐俐浦梭停狙搀班恒要法鞭纤军姻饶剐精品课程财务管理基础英文课件ch05Van Horne / Wachowicz Tenth Edition,CAPM is a model that describes the relationship between risk and expected (required) return; in this model, a securitys expected (required) return is the risk-free rate plus a premium based on the sys