B A 323 Chapter Notes - Chapter 8: Risk Premium, Capital Asset Pricing Model, Weighted Arithmetic Mean
Document Summary
Risk - hazard, a peril, exposure to loss or injury. Asset"s risk can be analyzed in two ways: Stand-alone basis, where the asset is considered by itself. Portfolio basis, where the asset is held as one of a number of assets in a portfolio. Stand-alone risk - risk an investor would face if they held only this one asset. No investment should be undertaken unless the expected rate of return is high enough to compensate for the perceived risk. Probability distributions - listings of possible outcomes or events with a probability assigned to each outcome. Expected rate of return (r hat) - rate of return expected to be realized from an investment. Weighed average of the probability distribution of possible results. Tighter the probability distribution, the lower the risk. The tighter the probability distribution of expected future returns, the smaller the risk of a given investment.
