1."Why is expected return considered forward-looking? What are the challenges for practitioners to utilize expected return?" (Cornett, Adair, and Nofsinger, 2012, p. 246). Expected return is “forward-looking” in the sense that it represents the return investors expect to receive in the future as compensation for the market risk taken. The challenge is that practitioners cannot precisely know what the future holds and thus what the expected return should be. Thus, we create methods to estimate the expected return. 2. "Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired." (Cornett, Adair, and Nofsinger, 2012, p. 246). An investor can allocate money between a risk-free security that has zero risk (β=0), and the market portfolio that has market risk (β=1). If 75% of the portfolio is invested in the market, then the portfolio will have a β=0.75. If only 25% is invested in the market, then the portfolio will have a market risk of β=0.25. The first example (β=0.75) might be taken by a less risk averse investor while the second example (β=0.25) illustrates the portfolio of a more risk averse investor. By allocating the investment money between 0 and 100% into the market portfolio, an investor can achieve any level of market risk desired. 3. "Compute the expected return given these three economic states, their likelihoods, and the potential returns:"

Economic StateProbabilityReturn
Fast Growth0.3040%
Slow Growth0.5010%
Recession0.20−25%

Expected return = 0.3×40% + 0.5×10% + 0.2×-25% = 12%
4. "If the risk-free rate is 6 percent and the risk premium is 5 percent, what is the required return?" (Cornett, Adair, and Nofsinger, 2012, p. 247). Required return = 6% + 5% = 11%
5. "The average annual return on the Standard and Poor's 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk...

...RISK & RETURN
TOPIC 4
Learning Objectives
1. Understand the meaning of risk and return
2. Identify risk and return relationship
3. Discuss the measurement of expected return
and standard deviation
4. Understand portfolio and diversification
5. Distinguish the different types of investment
risks
6. Measurement of return based on CAPM
WRMAS
2...

...expected return on a risky asset.
c. the expected return on a collection of risky assets.
d. the variance of returns for a risky asset.
e. the standard deviation of returns for a collection of risky assets.
PORTFOLIO WEIGHTS
2. The percentage of a portfolio’s total value invested in a particular asset is called that asset’s:
a. portfolio return.
b. portfolio weight.
c. portfolio...

...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. 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.
A financial decision...

...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 B if you want a portfolio beta of .90?
a. $0
b. $268
c. $482
d....

...Risk and Return: Portfolio Theory and Asset Pricing Models
Portfolio Theory Capital Asset Pricing Model (CAPM)
Efficient frontier Capital Market Line (CML) Security Market Line (SML) Beta calculation
Arbitrage pricing theory Fama-French 3-factor model
Portfolio Theory
• Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard...

...the context of a portfolio, the risk of an asset is divided into two parts: diversifiable risk (unsystematic risk) and market risk (systematic risk). Diversifiable risk arises from company-specific factors and hence can be washed away through diversification. Market risk stems from general market movements and hence cannot be diversified away. For a diversified investor what matters is the market...

...Risk and Return -II
PGDM/MMS- SEM-II
PROF. V. RAMACHANDRAN
FACULTY- SIESCOMS , NERUL
1
PORTFOLIOS & RISK
What is an Investment Portfolio
A group of Assets that is owned by an
Investor
Single Security is riskier than Investing in a
Portfolio.
Portfolio may contain- Equity Capital, Bonds ,
Real Estate, Savings Accounts, Bullion,
Collectibles etc.
In other words the Investor does not put all
his eggs in to one Basket.
2
Diversification...

...Powerline Network Corporation—Case Two: Risk and Return
Thomas Calderone, CJ Anderson, and Megan Wegener
FIN 480: Finance Capstone Course
Professor Randy Lewis
Spring Arbor University
February 7, 2013
Powerline Network Corporation: Risk and Return
Introduction
The topics of risk and return are crucial to financial management because it allows a company to maximize stock value—in which...

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