BA 142:

December 10, 2013

Return Total gain or loss experienced on an Risk A chance of financial loss return cannot be exactly predicted which results to risk Variability of returns associated with a given asset The more certain the return, the less variability and therefore the less risk Figure: The Value of an investment of $1 in 1926 (in nominal rates) T-bill: government short term bonds Long bond: government long term bonds Corporate bonds Small Cap: small companies, not so well traded in the standard market; profitable companies but smaller than S&P companies; most risky S&P: Standard and Poor top companies according to a US standards *The riskier the asset was, the higher the return should be; higher risk premium. In the Philippines Market rates are on average 10% p.a. Rates of Return (1926-1997) T-bill: not much movement; approximately 1% increase Long bond: Measuring Portfolio Return Portfolio Risk Expected Portfolio Return = (x1r1) + (x2r2) Portfolio Return Example Suppose you invest $55 in Bristol-Myers and $45 in McDonalds. The expected dollar retun on your BM is 10% with a standard deviation of 17.1 and on McDonalds it is 20% with sd of 20.8. Correlation Coefficient is 1. Portfolios with assets with a correlation coefficient less than 1 then the risk/variability decreases as more assets are added into the portfolio.