NAME: Devienna Antonetta Sudiarto

NIM: 201950456

Chapter 8: Risk and Return

8. 1. Risk and Return Fundamentals

Risk is a measure of the uncertainly surrounding the return that an investment will
earn or, more formally, the variability of returns associated with a given asset.
Return is the money made or lost on an investment over some period of time.
Total rate of return is the total gain or loss experienced on an investment over a given
period of time; calculated by dividing the asset’s cash distributions during the period, plus
change in value, by its beginning-of-period investment value.
Formula:

Three categories to describe how investors respond to risk:

1) Risk Averse; which is the attitude toward risk in which investors require an
increased return as compensation for an increase in risk.
2) Risk Neutral; which is the attitude toward risk in which investors choose the
investment with the higher return regardless of its risk.
3) Risk Seeking; which is the attitude toward risk in which investors prefer
investments with greater risk even if they have lower expected returns.

8. 2. Risk of a Single Asset

Methods of risk assessment:
1) Scenario Analysis, is an approach for assessing risk that uses several possible
alternative outcomes (scenarios) to obtain a sense of the variability among returns.
The common method involves considering pessimistic (worst), most likely
(expected), and optimistic (best) outcomes and the returns associated with them for
NAME: Devienna Antonetta Sudiarto
NIM: 201950456

a given asset, which is called the range. It is found by subtracting the return
associated with the pessimistic outcome from the return associated with the
optimistic outcome. The greater the range, the more variability/risk the asset is said
to have.
2) Probability Distributions, is a model that relates probabilities to the associated
outcomes. The simplest type of probability distribution is a bar chart, which
shows only a limited number of outcomes and associated probabilities for a given
period. If we know all the possible outcomes and associated probabilities, we could
develop a continuous probability distribution, which is a probability distribution
showing all the possible outcomes and associated probabilities for a given event.

The most common statistical measure used to describe an investment’s risk is its
standard deviation, which measures the dispersion around the expected value. The
expected value of return, is the average return that an investment is expected to
produce over time.
Formula: