COMM 298 Lecture 20: 20.pdf
Document Summary
It does not make much sense to talk about investment returns without talking about risk. Investments involve a trade-off between risk and return. Likelihood that actual outcome from and investment will differ from the expected outcome. (cid:80) often measured by the standard deviation of an asset (or portfolio) return. But: not all risk is created equal in finance. We will soon see that the total risk of an asset (measured by the asset"s standard deviation/ volatility) consists of both systematic (undiversifiable) and unsystematic (diversifiable) risk. Historical returns (cid:80) for the time period 1957 2008. Excess returns are equal to average returns minus the risk-free rate (i. e. the average return on a 3-months t-bill) T (cid:80) where r through t t is the realized return of a security in year t, for the years 1 (cid:80) this is also called the arithmetic average.
