ECON 132A Lecture Notes - Lecture 6: Standard Deviation, Market Risk, Expected Return
22 Apr 2016
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Market/systematic/nondiversifiable risk: risk factors common to whole economy (macroeconomy) If beta is 1, and if market goes up 2% then your stock goes up 2% If beta is -1, and if market goes up 10% then your stock goes down 10% If beta is 2, and if market goes up 2% then your stock goes up 4% Unique/firm-specific/nonsystematic/diversifiable risk: risk that can be eliminated by diversification (company specific) N = number of stocks in your portfolio. Adding more securities is going to reduce the risk significantly. Cant do anything about market risk b/c it"s nondiversifiable. The either move in the same direction, opposite, or independent. Try to avoid any securities that have high (close to 1) correlation. Efficient frontier: graphical representation of all the portfolios that maximize expected return at each level of portfolio risk. Expected return = risk free rate (10 year treasury bond) + beta[expected return of market risk free rate]
