What is the most true regarding diversification? Portfolio risk and return Prepared by Pamela Peterson Drake, Ph.D., CFA 1. c. Portfolio 1 is the most efficient portfolio as it gives us the highest return for the lowest level of risk. It can greatly increase the risk of a portfolio. On the other hand, there are some risks that affect all investments. Individual ... it complicates the task of constructing portfolios with ‘efficient’ risk return trade-off due to the growth of possible asset combinations. Risk and Return Discussion/Practice Problems … 0000003621 00000 n
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Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: Mean portfolio return 12% Var(P) 0.00845 sd(P) 9.2% • The risk of the portfolio is lower than the risk of either of the two stocks! 0000003333 00000 n
A portfolio comprises two securities and the expected return on them is 12% and 16% respectively. Risk and return questions and practice problems Risk and return part 2: Questions 1. Risk and Return: Portfolio Theory and Asset Pricing Models ANSWERS TO END-OF-CHAPTER QUESTIONS Determine return of portfolio if first security constitutes 40% of total portfolio. Risk of Portfolio of Two Assets: The risk of a security is measured in terms of variance or standard deviation of its returns. What is the market risk premium (r M - r RF)? Stock Percentage Of Portfolio (%) Beta Expected Return (%) A 20 1 15 B 30 0.85 13 C 50 1.20 10 The Risk Free Is 6 Percent. If markets are efficient, the price reflects Since the return of a portfolio is commensurate with the returns of its individual assets, the return of a portfolio is the weighted average of the returns of its component assets.The dollar amount of an asset divided by the dollar amount of the portfolio is the weighted average of the asset and the sum of all weighted averages must equal 100%. x�]K��Ƒ��W�e#�A�G��lP���
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Question: RISK AND RETURN You Own A Portfolio Consisting Of The Following Stocks. a. total return … total risk b. expected return … total risk c. total return … systematic risk d. expected return … systematic risk 13. Expected return = 0.4(0.05) + 0.6(0.15) = 0.02 + 0.09 = 0.11 or 11% The above can be checked with the capital weightage formulas for the minimum variance (risk).Substituting 10 Key Points To Remember. The risk-return relationship will now be measured in terms of the portfolio’s expected return and the portfolio… Once we have risk and return for individual securities, we can then calculate portfolio risk and return. Thus: E(R p) = ΣW i R i where i = 1,2,3 … n. Where W i represents the weight attached to asset I and R i is the asset’s return. A risk-averse investor would choose the portfolio over either Stock A or Stock B alone, since the portfolio offers the same expected return but with less risk. 0000000873 00000 n
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portfolio components, so there is no enhancement of portfolio return. First we turn our attention to the concept of expected return. trailer
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3. RISK AND RETURN This chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. Let us try and find the answers to Joe’s questions. The expected return – beta relationship is the implication of the CAPM that security risk premiums (expected excess returns) will … %%EOF
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Our final step would be the plot of the risk and return combined metric, return per unit of risk, which plots the portfolio risk and return for different values of portfolio allocation. ∴ Portfolio return is 12.98%. i) Tax risk j) Etc 4. 8. You will get 30 minutes to complete the test. Probability Possible rate of return 0.25 0.09 %PDF-1.5
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