Table of Contents

Chapter 5: Risk, Return and the Historical Record SLIDE #

Return and Risk definitions 4
Rate of Return definition 6
Holding Period Return (HPR) 7
Holding Period Return (HPR) Example 8, Ch 5(8)
Measuring Investment Return of multiple period 9
Arithmetic Average (simple average of HPRs) 10
Geometric Average 11, Ch5 (1)
Conventions for Annualizing Returns 12
APR 14, Ch5 (2,9)
EAR 17
APR and EAR Example 18,19, Ch 5(10)
Inflation and the Real Rate of Interest 23
Example 24
Approximation and exact formula for real interest rate 26
Examples 27,28,29, Ch 5(11,12)
The Equilibrium Nominal Rate of Interest 30, Ch 5(3)
Expected Return 33, Ch5(4)
Variance and Standard Deviation 35,36
Squared Deviation of expectation 36
Using Time Series of Returns 40
Expected return and expected standard deviation 40
The Sharpe Ratio 45, Ch5(13)
Normal Distribution 48,49, Ch5(5)
Deviation from Normality and Tail Risk 52
Skewness 53, Ch5(6)
Value at Risk (VAR) 55, Ch5(7)
The Equilibrium Nominal Rate of Interest 56
Chapter 6: Efficient Diversification
Diversification and Portfolio Risk 6
Total Risk, Unsystematic and Systematic 6, Ch6(3)
Unsystematic risk quiz question 9
Systematic risk Ch6(1,2)
Portfolio diversification quiz question 10, Ch6(4,5)
Asset Allocation with Two Risky Assets 13
Symbols 14
Correlation 15
Correlation Example 17
Correlation Example with 2 states of economy 19 Ch6(6)
Expected Return and Standard Deviation of a portfolio 23
Example 24,25
Conceptual explanation 24
Risk return space, investment opportunity set, minimum variance portfolio 27
Graph showing what portfolio is better/ diversification benefit and correlations 28
Portfolio opportunity set Ch6(8)
Diversification benefit question 29
Global minimum variance portfolio 30

Chapter 6 Part 2: Efficient Diversification

Complete Portfolio’s, expected return, variance and standard deviation 5
Standard deviation Ch6(14)
Expected returnCh6(15)
Complete portfolio Ch6 (16)
Capital Allocation Line (CAL) 7, Ch6(9)
Risky asset and risk- free asset expected return (without weights) (given portfolio std deviation) 8,9
(without weights) (Given portfolio expected return) 10,11 Ch6(17)
(without weights) (Given portfolio standard deviation) Ch6(18)
Optimal Risky Portfolio 15, Ch6(10)
Efficient Diversification with Many Risky Assets 19,20
Minimum-variance frontier, global minimum variance portfolio, efficient frontier of risky assets
21, Ch6(11), Ch6(12)
 The Preferred Complete Portfolio and a Separation Property 23, Ch6 #13
Efficient portfolio question 25

Chapter 7: Capital Asset Pricing and Arbitrage Pricing Theory

Realized returns vs. expected return and excess return 4,5
Single factor model 7, Ch7(1)
2 options of describing stock market 7
Scatter Plot 8
Security Characteristic Line 10,11,12,13, Ch7(4)
Single Index Model (beta) 14, Ch7(7)
Single Index Model cont. (residual, alpha) 15, Ch7(3)
Example 16
Single Index Model 3 components 17
Single factor model Quiz question 18
Statistical Interpretation of the single factor model 23
Expected Return 24
Example 25,26,27
Risk 28,30
Example 29
R squared 30
Risk measured on graphs 31
Breaking down variance of stocks to systematic and firm specific 33,34,35,36,37
Correlation and covariance 38
Example 39,40,41
CAPM 45, Ch7(5,6,8,910)
Correlation and covariance 38
Example 39,40,41, Ch7(15,16)
CAPM 46,47,48

Assumptions and Implications 48,49

The Passive Strategy is Efficient 51
Expected Returns on Individual Securities 52
The Security Market Line 53,54
The Risk Premium of the Market Portfolio 55
Expected excess return given a beta Example 56, Ch7(12)

Standard deviation index model 5, Ch7(13)

Risk Aversion coefficient Example 57,58,59, Ch7(17,18)
Quiz CAPM question 60
How well does CAPM work? 62,63,64

Roll’s critique 63, Ch7(11)