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Risk & Return

Risk & Return

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Published by rakeshdasluckoo

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Published by: rakeshdasluckoo on Mar 04, 2010
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02/14/2011

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RISK AND RETURNRISK AND RETURN
 
Probability DistributionsProbability Distributions
Investors cannot predict security returns withInvestors cannot predict security returns withcertainty.certainty.
 They can list the potential outcomes and have They can list the potential outcomes and havea sense for the likelihood that each of thesea sense for the likelihood that each of theseoutcomes will occur.outcomes will occur.
Probabilities represent the relative likelihoodProbabilities represent the relative likelihoodeach outcome will occur. The probabilities foreach outcome will occur. The probabilities forthe full range of outcomes must sum to one.the full range of outcomes must sum to one.Individual probabilities cannot be negative.Individual probabilities cannot be negative.
 
ReturnsReturns
Expected ReturnExp
 
ected Return- the return- the returnthat an investor expects tothat an investor expects toearn on an asset, given itsearn on an asset, given itsprice, growth potential, etc.price, growth potential, etc.
Required ReturnReq
 
uired Return- the return- the returnthat an investor requires onthat an investor requires onan asset given itsan asset given itsrisk risk andandmarket interest rates.market interest rates.

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