1、Return and Risk:The Capital Asset Pricing Model(CAPM)WisdomoDont put all your eggs in one basket.-AnonymousoThe reason why corporations do not enter gambles with volatile payoffs and small positive expected returns is that managers know that generally volatility matters.-Rene M.Stulz Mini Case Risk
2、and return are concepts that we deal with every day.For many people it is quite acceptible to risk$20 every week in the lottery,in view of potential returns of hundreds of thousands(or even millions)of dollars.When you buy a lottery ticket,the risk of losing your$20 is very high(how often have you w
3、on anything at lotto).In general,in order to take a higher risk,you would expect a much greater potential payoff.Consider a lottery where each ticket costs$2000.Would you buy a ticket if the odds were the same as in the lottery where the ticket costs$20?Probably not-you would expect much better odds
4、 of winning in order to risk such a big amount of money.“Better odds”means that you would expect a much higher probability of winning back your bet.How much you will be willing to risk,given a set probability of winning or losing,depends on your character-you may be a risk-lover or you may be risk a
5、verse.oddoStange,unusualoSeperated from a part or set to which it belongs to eg.two odd socksoThat cant be divided exactly by 2oNot happening regularly eg.He likes the odd drinks.oNear in number eg.They lived abroad for 30 odd years.oOdd jobs:small practical jobs that you do in your homeoddsoThe pos
6、sibility that something will or will not be happen eg.The odds are that he will fail the examoThis possiblity expressed in numbers when making a bet 打赌的赔率 eg.If you bet$1 on a horse with the odds at 10 to 1 and the horse wins,you get$11 back.Chapter Outline11.1 Individual Securities11.2 Expected Ret
7、urn,Variance,and Covariance11.3 The Return and Risk for Portfolios11.4 The Efficient Set 11.5 Riskless Borrowing and Lending11.6 Announcements,Surprises,and Expected Return11.7 Risk:Systematic and Unsystematic11.8 Diversification and Portfolio Risk 11.9 Market Equilibrium11.10 Relationship between R
8、isk and Expected Return(CAPM)11.1 Individual SecuritiesKey Termsoexpected return 期望报酬率ovariance 方差ostandard deviation 标准差ocovariance 协方差ocorrelation 相关性obeta coefficient 系数oThe characteristics of individual securities that are of interest are the:nExpected ReturnnVariance and Standard DeviationnCova
9、riance and Correlation(to another security or index)11.2 Expected Return,Variance,and CovarianceI.Expected return and VarianceKey Termsostate of economy 经济状况odepression 经济萧条期orecession 经济衰退期onormal 一般oboom times 经济繁荣期omultiplyby乘II.Covariance and CorrelationKey Termsoa positive dependency 正依赖性正依赖性oa
10、 positive relationship 正相关正相关ogive rise to 引起引起oa negative dependency 副依赖性副依赖性oa negative relationship 负相关负相关ooffset 补偿补偿odivideby 除除opositively correlated 正相关的正相关的opositively correlation 正相关正相关onegatively correlated 负相关负相关ouncorrelated 不相关不相关ostandardize 标准化标准化ointerrelated 相关的相关的operfect positive/
11、negative/correlation 完全正相关完全正相关ono correlation 不相关不相关1.DefinitionnCovariance and correlation measure how two random variables are related.n协方差和相关性是反映两个随即变量相关程度的计量工具。2.Calculation and analysis of Covariancenpositive relationshipnnegative relationshipnno relation3.Calculation and analysis of Correlati
12、onoA is positively/negatively related to BoA and B are positively/negatively correlated.A and B are uncorrelated.oThere is a positive/negative relation between A and B.There is no relation between A and B.I.Expected vs.Unexpected ReturnsoRealized returns are generally not equal to expected returns.o
13、There is the expected component and the unexpected component.nAt any point in time,the unexpected return can be either positive or negative.nOver time,the average of the unexpected component is zero.11.6 Announcements,surprises,and expected returnsII.Announcements and NewsoAnnouncements and news con
14、tain both an expected component and a surprise component.oIt is the surprise component that affects a stocks price and,therefore,its return.oThis is very obvious when we watch how stock prices move when an unexpected announcement is made or earnings are different than anticipatedoTotal Return =expec
15、ted return+unexpected return11.7 Risk:Systematic and UnsystematicoRisk factors that affect a large number of assetsoAlso known as non-diversifiable risk or market riskoIncludes such things as changes in GDP,inflation,interest rates,etc.I.Systematic riskoRisk factors that affect a limited number of a
16、ssetsoAlso known as unique risk and asset-specific riskoIncludes such things as labor strikes,part shortages,etc.II.Unsystematic riskIII.ReturnsoTotal Return=expected return+unexpected returnoUnexpected return=systematic portion+unsystematic portionoTherefore,total return can be expressed as follows
17、:nTotal Return=expected return+systematic portion+unsystematic portion11.8 Diversification and Portfolio RiskI.The Effect of Diversification:Another Lesson from Market History II.The Principle of Diversification III.Diversification and Unsystematic Risk IV.Diversification and Systematic Risk V.Concl
18、usion 11.8 Diversification and Portfolio RiskoDiversification can substantially reduce the variability of returns without an equivalent reduction in expected returns.oThis reduction in risk arises because worse than expected returns from one asset are offset by better than expected returns from anot
19、her.oHowever,there is a minimum level of risk that cannot be diversified away,and that is the systematic portion.Diversifiable RiskoThe risk that can be eliminated by combining assets into a portfoliooOften considered the same as unsystematic,unique,or asset-specific riskoIf we hold only one asset,o
20、r assets in the same industry,then we are exposing ourselves to risk that we could diversify away.Total RiskoTotal risk=systematic risk+unsystematic riskoThe standard deviation of returns is a measure of total risk.oFor well-diversified portfolios,unsystematic risk is very small.oConsequently,the to
21、tal risk for a diversified portfolio is essentially equivalent to the systematic risk.11.10 Risk and Return(CAPM)oExpected Return on the Market:Expected return on an individual security:PremiumRisk Market FMRR)(FMiFiRRRRMarket Risk PremiumThis applies to individual securities held within well-divers
22、ified portfolios.Expected Return on a SecurityoThis formula is called the Capital Asset Pricing Model(CAPM):)(FMiFiRRRRAssume bi=0,then the expected return is RF.Assume bi=1,thenMiRR Expected return on a security=Risk-free rate+Beta of the securityMarket risk premiumRelationship Between Risk&ReturnE
23、xpected returnb b)(FMiFiRRRRFR1.0MRRelationship Between Risk&ReturnExpected returnb b%3FR%31.5%5.135.1 i%10MR%5.13%)3%10(5.1%3iRQuick QuizoWe routinely assume that investors are risk-averse return-seekers;i.e.,they like returns and dislike risk.If so,why do we contend that only systematic risk and n
24、ot total risk is important?oThis question,of course,gets to the point of the chapter:That rational investors will diversify away as much risk as possible.From the discussion in the text,most students will also have picked up that it is quite easy to eliminate diversifiable risk in practice,either by holding portfolios with 25 to 30 assets,or by holding shares in a diversified mutual fund.And,as noted in the text,there will be no return for bearing diversifiable risk,thus,total risk is not particularly important to a diversified investor.
