FINA 2710 Chapter Notes - Chapter 12: Capital Asset Pricing Model, Economic Equilibrium, Risk Premium
30 Jan 2017
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Based on the probabilities of possible outcomes (cid:498)expected(cid:499) means average if the process is repeated many times. The (cid:498)expected(cid:499) return does not have to be a possible return. Suppose you have predicted the following returns for stocks c and t in 3 possible states of the economy. E (rc) = (0. 3)(0. 15) + (0. 5)(0. 1) + (0. 2)(0. 02) = 9. 9% or 0. 099. E (rt) = (0. 3)(0. 25) + (0. 5)(0. 2) + (0. 2)(0. 01) = 17. 7% or 0. 177. You can use unequal probabilities for the entire range of possibilities. An asset"s risk and return is important in how it affects the risk and return of. The risk-return trade off for a portfolio is measures by the portfolio"s. The sum of risks of individual assets does not equal the risk of the portfolio expected return and standard deviation, just as with individual assets. A collection of all assets in the economy the portfolio. Suppose you have ,000 to invest and you have purchased securities in the following amounts.
