Ch7 Notes Jan29,2018

Topics 1. Risk in investment

2. Investment Returns

3. Beta and CAPM Model

4. Security Market Line

Definition Rate of return,

And Stand alone risk,
Calculation Probability distribution,
Expected rate of return,
Required rate of return
Risk Aversion
Variance,
Standard deviation,
Coefficient of variation,
Portfolio returns,
Correlation coefficient,
Portfolio
Beta
CAPM
SML

Questions 1. How to explain the definition and how to compare two stocks’ risk by SD and CV
And -How to explain Correlation coefficient (ρ)=1 or =-1? Read PPT 7-28
Examples -Example P225, Problem7-7

2.What is beta of a stock that is as risky as the market? Why is beta the
theoretically correct measure of a s stock’s risk? How to calculate a portfolio’s beta
-Read text book P211-214, PPT 7-34,35,36,37
-Example: P224, Problem7-1, P226 Problem7-15

3.Is there any difference between individual stock’s risk and the risks of a
portfolio? Can the risk of a portfolio be reduced to zero by increasing the number
of stocks in the portfolio? Compare Diversifiable Risk vs. Market Risk.
- Read book P208-211, PPT 7-32,33

4.Explain” Risk Aversion”, compare the definitions of : Expected rate of return,

Required rate of return, Realized rate of return, Risk free rate of return, Required
rate of return on a portfolio, Market risk premium.
-Read book P201-202,P215, PPT 7-49,50,51
-Example: P228 Problem7-17
5.What is the CAPM model? How can you sketch SML graph by CAPM model?
-Read book chapter P215-219, PPT 7-38,40,41,42
-Example: P225, Problem 7-6
6.Will investors purchase a stock which expected return is lower than required rate
of return? How can you show this situation through SML graph? How can beta, risk
aversion and inflation rate affect SML’s slope?
- Read book chapter P215-219, PPT 7-38,40,41,42
-Example: P225, Problem7-9,11, P226, Problem 7-15