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Return Risk

In: Business and Management

Submitted By Nathan123360
Words 2254
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Chapter 11
Return and Risk: The Capital Asset Pricing
Model (CAPM)

Copyright © 2015 by the McGraw-Hill Education (Asia). All rights reserved.

11.1 Individual Securities


The characteristics of individual securities that are of interest are the:




Expected Return
Variance and Standard Deviation
Covariance and Correlation (to another security or index)

11-1

11.2 Expected Return, Variance, and
Covariance
Consider the following two risky asset world. There is a 1/3 chance of each state of the economy, and the only assets are a stock fund and a bond fund.
Scenario
Recession
Normal
Boom

Rate of Return
Probability Stock Fund Bond Fund
33.3%
-7%
17%
33.3%
12%
7%
33.3%
28%
-3%
11-2

Expected Return

Scenario
Recession
Normal
Boom
Expected return
Variance
Standard Deviation

Stock Fund
Rate of
Squared
Return Deviation
-7%
0.0324
12%
0.0001
28%
0.0289
11.00%
0.0205
14.3%

Bond
Rate of
Return
17%
7%
-3%
7.00%
0.0067
8.2%

Fund
Squared
Deviation
0.0100
0.0000
0.0100

11-3

Expected Return
Scenario
Recession
Normal
Boom
Expected return
Variance
Standard Deviation

Stock Fund
Rate of
Squared
Return Deviation
-7%
0.0324
12%
0.0001
28%
0.0289
11.00%
0.0205
14.3%

Bond Fund
Rate of
Squared
Return Deviation
17%
0.0100
7%
0.0000
-3%
0.0100
7.00%
0.0067
8.2%

E (rS )  1  (7%)  1  (12%)  1  (28%)
3
3
3
E (rS )  11%

11-4

Variance
Scenario
Recession
Normal
Boom
Expected return
Variance
Standard Deviation

Stock Fund
Rate of
Squared
Return Deviation
-7%
0.0324
12%
0.0001
28%
0.0289
11.00%
0.0205
14.3%

Bond Fund
Rate of
Squared
Return Deviation
17%
0.0100
7%
0.0000
-3%
0.0100
7.00%
0.0067
8.2%

(7%  11%)  .0324
2

11-5

Variance
Scenario
Recession
Normal
Boom
Expected return…...

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