BUS 420 Chapter Notes - Chapter 2: Risk Premium, Market Portfolio, Law And Justice
20 Jul 2020
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Document Summary
Investment returns measure the financial results of an investment. Returns may be historical or prospective (anticipated). An investment costs ,000 and is sold after 1 year for ,100. Typically, investment returns are not known with certainty. Investment risk pertains to the probability of earning a return less than that expected. The greater the chance of a return far below the expected return, the greater the risk. Standard deviation measures the stand-alone risk of an investment. The larger the standard deviation, the higher the probability that returns will be far below the expected return. Stand alone risk in capital budgeting the assumption is: the cash flow of the project is separate from the firm"s other assets. In stand alone risk analysis sensitivity analysis involves changing the. Historical data for stock returns and average return and standard deviations for stand-alone investments. New historical data for stocks and portfolio returns. The portfolio"s average return is the weighted average of the stocks" average returns.
