EFB210 Lecture Notes - Modern Portfolio Theory, Covariance, Probability Distribution
Document Summary
A company borrowing money faces the risk that interest rates may change. A company building a new factory faces the risk that product sales may be lower than expected. Managers need to understand what causes risk/how it should be measured/the effect of risk on the rate of return required by investors. These issues are discussed using the framework of portfolio theory. Shows how investors can maximise the expected return on portfolio of risky assets for a given level of risk. Relationship between risk and expected return is described by 2 models for valuing assets under uncertainty: capital asset pricing model (capm) Links expected return to a single source of rise: fama and french three-factor model. Implies that there are 3 risk factors for which an investor may demand compensation. Return on investment is the financial outcome for the investor. If someone invests in an asset and later sells the asset for , the dollar return is .
