FIN 501 Chapter Notes - Chapter 2: Toronto Stock Exchange, Squared Deviations From The Mean, Standard Deviation

• School: Ryerson University
• Department: Finance
• Course: FIN 501
• Professor: Edward Blinder

Document Summary

Diversification is important because portfolios with many investments usually produce a more consistent and stable total return than portfolios with just one investment. When you own many stocks, even if some of them decline in price, others are likely to increase in price (or stay at the same price) We assume that investors prefer more return to less return and second, we assume that investors prefer less risk to more risk. Expected return: average return on a risky asset expected in the future. Two states of economy = means that there are two possible outcomes. Expected return on a security or other asset = the sum of the possible returns multiplied by their probabilities. Risk premium = expected return risk-free rate. Using our projected returns, we can calculate the projected or expected risk premium as the difference between the expected return on a risky investment and the certain return on a risk-free investment.