Analysis of Risk and Return
Chapter 8
Analysis of Risk and
Return
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Introduction
This chapter develops the risk-return relationship for individual projects
(investments) and a portfolio of projects.
The principles can also be applied to securities. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Meaning and Measurement of Risk
Risk
The possibility that actual cash flows will be different from forecasted cash flows
Alternate definition: The possibility that actual cash flows will be below the forecasted cash flows.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Meaning and Measurement of Risk
Probability Distributions
Probability
The percentage change that a particular outcome will occur
Probability Distribution
Indicates the percentage change of occurrence of each of the possible outcomes
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
Meaning and Measurement of Risk
Probability Distribution:
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
Meaning and Measurement of Risk
Probability Distributions
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
Meaning and Measurement of Risk
Expected Value
n
ˆ = rj ×pj r j =1
© 2015 Cengage Learning. All Rights
Analysis of Risk and
Return
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Introduction
This chapter develops the risk-return relationship for individual projects
(investments) and a portfolio of projects.
The principles can also be applied to securities. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Meaning and Measurement of Risk
Risk
The possibility that actual cash flows will be different from forecasted cash flows
Alternate definition: The possibility that actual cash flows will be below the forecasted cash flows.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Meaning and Measurement of Risk
Probability Distributions
Probability
The percentage change that a particular outcome will occur
Probability Distribution
Indicates the percentage change of occurrence of each of the possible outcomes
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
Meaning and Measurement of Risk
Probability Distribution:
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
Meaning and Measurement of Risk
Probability Distributions
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
Meaning and Measurement of Risk
Expected Value
n
ˆ = rj ×pj r j =1
© 2015 Cengage Learning. All Rights