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Seminar 04

# Seminar 04

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Seminar 04 Notes.
\
Risk and Returns.
Seminar 04 Notes.
\
Risk and Returns.

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03/18/2014

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FINANCIAL MARKETS & INSTITUTIONS
[B Sc (Hons) in Management]
SEMINAR 4
Risk & Return
1. Risk vs Return Calculation
\u2022Historical (past)
\u2022Expectation (future)
2. Rate of Return
\u2022Return (%) = [(income) + (capital gain/loss)]
initial investment
\u2022Bonds vs Shares
\u2022The higher the risk, the higher the return required to
attract investors
\u2022Return of Single Asset vs Portfolio of Assets
State of
State of
economy
economy
Recession
Recession
Normal
Normal
Boom
Boom
Probability
Probability
P
P
0.20
0.20
0.50
0.50
0.30
0.30
Return
Return
A
B
A
B
4%
4%
8%
8%
14%
14%
-10%
-10%
18%
18%
30%
30%
Expected return R is just a weighted average
Expected return R is just a weighted average
E(r) = P(r
E(r) = P(r1
1)
)x
xr
r1
1 + P(r
+ P(r2
2)
)x
xr
r2
2 + \u2026 + P(r
+ \u2026 + P(rs
s)
)x
xr
rs
s
Example (Expected Return)

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