# MGT 181 Chapter Notes - Chapter 13: Risk-Free Interest Rate, Expected Return, Risk Premium

by OC2409450

Department

Rady School of ManagementCourse Code

MGT 181Professor

BuchananChapter

13This

**preview**shows page 1. to view the full**4 pages of the document.** Return, Risk, and the Security Market Line

Expected Returns and Variances

Expected Return

● Expected return

○ The return on a risky asset expected in the future

● Risk premium = expected return - risk free rate

● To get the expected avg for an asset across different economic conditions is calculated

by multiplying the probability of the economic situation by the return in that situation and

then adding up all the results for all periods

Calculating the Variance

● Take the square of the standard deviation, multiply by the probability

○ Do this for every value and then add them up

Portfolios

● Portfolio

○ A group of assets such as stocks and bonds held by an investor

Portfolio Weights

● The percentage of a portfolio’s total value that is invested in a particular asset

Portfolio Expected Returns

● To calculate your return from your portfolio, multiply the percentage of your portfolio a

given asset is by its return, repeat for every asset, and then add them up

Portfolio Variance

● Multiply the variance of each asset by its weight and add them up

Announcements, Surprises, and Expected Returns

Expected and Unexpected Returns

● Total return = expected return + unexpected return = E(R) + U

● Expected returns

○ The part that people can predict

○ Based on the market’s understanding today of things that could influence the

company/stock price

● Unexpected returns

○ Come from unexpected news that you cannot predict

○ Flash decisions, press conferences, economics, natural disasters, etc.

Announcements and News

● The way the stock changes depends on the stock’s relationship to the news, and the

impact reflected in the change in price depends on how much of the announcement is

actually new information

● Discounted announcement

○ An announcement that isn’t news

○ Already predicted

● Innovation/surprise

○ Another name for new information

● Announcement = expected part + surprise

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