Management and Organizational Studies 2310A/B Chapter Notes - Chapter 13: Risk-Free Interest Rate, Capital Asset Pricing Model, Arbitrage

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

Document Summary

Systematic risk affect almost all assets in the economy. Unsystematic risk affects small number of assets. Highly diversified portfolios have almost no systematic risk. Expected return: return on a risky asset expected in the future. In the long term, the riskier asset will give higher overall return, because the extremes should balance out. In the short term, the lower risk asset you are less likely to make a high loss, but also not as likely to make a huge gain - safer. Risk premium = expected return - risk free rate. Expected return is equal to the sum of possible returns, multiplied by their probabilities. Portfolio: group of assets such as stocks or bonds held by an investor. Portfolio weights: percentage of a portfolio"s total value in a particular asset: must add up to 1, because all money is invested somewhere, ex. investment in a portfolio has the weight of 25%