Management and Organizational Studies 2310A/B Lecture Notes - Lecture 11: Equity Premium Puzzle, Risk-Free Interest Rate, Market Portfolio

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Danny Morrison

Document Summary

Chapter 11: systemic risk and the equity risk premium. For large portfolios, investors expect higher returns for higher risk this is not true of individual stocks. Stocks have unsystematic and systematic risk; only systematic is rewarded. Portfolio weights: the fractions of the total investment in the portfolio held in each individual investment in the portfolio add up to 100% so that they represent the way we have divided our money. Portfolio returns: once calculated the pw, can calculate the pr weighted averaged of the returns on the investments in the portfolio, weight corresponds to pw. Expected portfolio return: weighted average of the expected returns of the investments. Computing a portfolio"s variance and standard deviation. Sd(r1), sd(r2) = the standard deviation for stock 1 and 2. Corr(r1, r2) = the degree of correlation between the returns on stock 1 and 2.