FIN222 Lecture Notes - Lecture 5: Sudden Strike, Capital Asset Pricing Model, Market Portfolio

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2 Jun 2018

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LECTURE 5.

RISK AND

RETURN

Risk and Return –

Capital Market

Computing

historical returns

Realised return (aka total return): total return that occurs

over a particular time period

  





=   

Assume all dividends are immediately reinvested and used

to purchase additional shares of the same shares or

security, annual realised return :

        

Average annual returns: average of realised returns for

each year



  



Dividend Yield: return from cash income

Capital Gain Yield: return from price

increase/decrease

Variance and

volatility of returns

Variance estimate using realised return: a measure of the

variability of returns:







−





−







−



Standard deviation (aka volatility):

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

Normal

Distribution

Normal Distribution: a symmetric distribution that is

characterised by its average and standard deviation.

95% Prediction Interval: the range of returns within which

we are 95% confident that next period’s return will lie

 

Risk Components

General looking

into risk

components

The total risk of holding a portfolio having 2 components:

Systematic Risk: common risk (aka market risk); non-

diversifiable risk; cannot be eliminated

Unsystematic Risk: independent risk; diversifiable risk;

can be eliminated

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Document Summary

Realised return (aka total return): total return that occurs over a particular time period. Capital gain yield: return from price increase/decrease (cid:1844)(cid:3047)+(cid:2869)= (cid:3005)(cid:3036)(cid:3049)+1 ++1 . = (cid:1830)(cid:1861)(cid:1874)(cid:1861)(cid:1856)(cid:1857)(cid:1866)(cid:1856) (cid:1861)(cid:1857)(cid:1864)(cid:1856)+(cid:1829)(cid:1868)(cid:1861)(cid:1872)(cid:1864) (cid:1859)(cid:1861)(cid:1866) (cid:1861)(cid:1857)(cid:1864)(cid:1856) security, annual realised return (cid:1844)(cid:3048)(cid:3039): Assume all dividends are immediately reinvested and used to purchase additional shares of the same shares or. Average annual returns: average of realised returns for each year (cid:883)+(cid:1844)(cid:3048)(cid:3039)=(cid:4666)(cid:883)+ (cid:1844)(cid:2869)(cid:4667)(cid:4666)(cid:883)+ (cid:1844)(cid:2870)(cid:4667)(cid:4666)(cid:883)+ (cid:1844)(cid:2871)(cid:4667)(cid:4666)(cid:883)+ (cid:1844)(cid:2872)(cid:4667) (cid:1844)= (cid:4666) (cid:1844)(cid:883)+ (cid:1844)(cid:884)+ (cid:1844)(cid:885)+ + (cid:1844)(cid:1846)(cid:4667) (cid:4667) (cid:883)(cid:1846) Variance estimate using realised return: a measure of the variability of returns: (cid:1870)(cid:4666)(cid:1844)(cid:4667)= (cid:883)(cid:1846) (cid:883)[((cid:1844)(cid:2869) (cid:1844))(cid:884) +((cid:1844)(cid:2869) (cid:1844))(cid:884) ++((cid:1844)(cid:2869) (cid:1844))(cid:884) ] Normal distribution: a symmetric distribution that is characterised by its average and standard deviation. 95% prediction interval: the range of returns within which we are 95% confident that next period"s return will lie. Risk components general looking into risk components (cid:1844) (cid:884) x sd(cid:4666)r(cid:4667) The total risk of holding a portfolio having 2 components:

Related Questions

Chapter 10, Problem 6

Using the data in the following table, calculate the return for investing in Boeing stock (BA) from January 2, 2008, to January 2, 2009, and also from January 3, 2011, to January 3, 2012, assuming all dividends are reinvested in the stock immediately.

Historical Stock and Dividend Data for Boeing
Date	Price	Dividend	Date	Price	Dividend
1/2/2008	86.62		1/3/2011	66.40
2/6/2008	79.91	0.40	2/9/2011	72.63	0.42
5/7/2008	84.55	0.40	5/11/2011	79.08	0.42
8/6/2008	65.40	0.40	8/10/2011	57.41	0.42
11/5/2008	49.55	0.40	11/8/2011	66.65	0.42
1/2/2009	45.25		1/3/2012	74.22

Chapter 11, Problem 5

Using the data in the following table, estimate

The average return and volatility for each stock

The covariance between the stocks

The correlation between these two stocks.

	2007	2008	2009	2010	2011	2012
Stock A	-10%	20%	5%	-5%	2%	9%
Stock B	21%	7%	30%	-3%	-8%	25%

plummanatee39

Part 1:

Blair purchased 300 shares of stock last year at a total cost of $13,380. He has received a total of $600 in dividends on these shares. Today, Blair sold the shares at a price per share of $35. What is his total return in dollars on this investment?

$300

$-2,280

$-2,580

$-300

Part 2:

Chase Bank pays an annual dividend of $1.17 per share on its common stock. One year ago, this stock sold for $54.00 per share. Today, the stock is priced to sell at $32.20 a share. What is the capital gains yield?

-33.62 percent

-38.18 percent

-29.45 percent

-40.37 percent

Part 3:

A stock produced the following returns over the past 5 years: 13.5 percent, 4.3 percent, -14.4 percent, 22.9 percent, and 11.3 percent. What is the arithmetic average risk premium for this stock if the average risk-free rate for the period was 4.4 percent?

3.12 percent

3.82 percent

2.92 percent

3.62 percent

ultramarinecicada210

1) The principal amount of a bond that is repaid at the end of the loan term is called _________.

2) _________ plots the yields on bonds relative to maturity.

3) A _________ is an unsecured bond, for which no specific pledge of property is made

4) An unexpected decrease in market interest rates will cause a coupon bond's yield to maturity to ___________.

5) The yield to maturity on a premium bond ____________ the bond's coupon rate.

6) Assume a constant dividend growth. The _________ of a stock equals its capital gains yield.

7) If a firm pays a constant annual dividend, then the capital gains yield is equal to ____.

8) According to the dividend growth model, the required rate of return is equal to the capital gains yield if the dividend growth rate is ______.

9) Assume a constant dividend growth. A decrease in the capital gains yield will ______ the current value of a stock.

10) _______________ can be used to value the stock of firms that pay no dividends.

11) The reward for bearing risk is called the ___________.

12) The higher the risk, the _____ the return.

13) The geometric average return is _____ than the arithmetic average return for a given set of returns.

14) A group of assets held together by an investor is referred to as a __________.

15) Unsystematic risk can also be referred to as asset-specific risk, ________ risk, idiosyncratic risk, or unique risk.

16) ________ refers to the practice of investing in a variety of diverse assets as a means of reducing risk.

17) An unexpected increase in the variable costs for a firm is an example of _____________ risk.

18) An unexpected decrease in corporate tax rates is an example of __________ risk.

19) If a risky security has more risk than the overall market, its beta coefficient is _______ 1.

20) All else constant, an increase in the market value of preferred stock will affect a firm's weighted average cost of capital by changing the ______ of preferred stock.

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FIN222 Lecture Notes - Lecture 5: Sudden Strike, Capital Asset Pricing Model, Market Portfolio

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