CHAPTER 8 – RISKS AND RETURNS

NOTES

-One way to reduce the risk of investing is to hold a diversified portfolio of stocks.

In his bestselling book, The Black Swan, Professor Nassim Taleb defines a Black Swan event
as: A highly improbable event with three principal characteristics It is unpredictable, it carries a
massive impact, and after the fact, we concoct an explanation that makes it appear less
random, and more predictable than it was.

A stock’s risk can be considered in two ways: (a) on a stand-alone, or singlestock, basis, or (b)
in a portfolio context, where a number of stocks are combined and their consolidated cash flows
are analyzed.' There is an important difference between stand-alone and portfolio risk, and a
stock that has a great deal of risk held by itself may be much less risky when held as part of a
larger portfolio.

Investors, on average, think a stock's expected return is too low to compensate for its risk, they
will start selling it, driving down its price and boosting its expected return. Conversely, if the
expected return on a stock is more than enough to compensate for the risk, people will start
buying it, raising its price and thus lowering its expected return. The stock will be in equilibrium,
with neither buying nor selling pressure, when its expected return is exactly sufficient to
compensate for its risk.
^Di ko gets
Investors like returns and dislike risks.

There is a fundamental trade-off between risk and return: to entice investors to take on more
risk, you have to provide them with higher expected returns.

Investors who are less comfortable bearing risk tend to gravitate toward lower-risk investments,
while investors with a greater- risk appetite tend to put more of their money into higher-risk,
higher-return investments.
Total resources of country / Money circulating or money supply = awan HAHAAA

Pag tumaas ang peso, dehado yung mga nakakareceive ng dollar kasi nabbaawa power ni
dollar

(3)
Prob is high at .35
1$ = .95euro
^mas mataas si euro
Monthly Returns

Dollar return = Stock price at end of month – Stock price at beginning of month +
Dividends

To put things in terms of a percentage return, the month’s percentage return is the following:
Percentage return = Dollar return/Stock price at the beginning of the month

One way to measure the risk of an asset is to examine the variability of its returns. For
comparison, an analyst may want to determine the level of return and the variability in returns
for these two stocks to see whether investors in the higher risk stock earned a higher return
over time to compensate or reward them for the higher risk.

Average Computation

Deviation

Note: The sum of the deviations must always be zero.

Square the Deviation
-to measure risk kasi lagi siyang magpopositive kahit negative yung values

Variance

Standard Deviation
#19
Observations:
Higher returns, higher yields.
Higher returns, higher standard deviation.
Significant difference between the two stocks but the variation allows less risks kasi
more risks dun sa isa pero properly earning naman yung isa. Kumbaga yung pagiging super
different or diverse nung dalawang stock leads para maka-earn pa rin kahit less yung earnings
dun sa isa.

May risk of diversification – kasi positive yung correlation

#20
Observation:
Highest rate and highest STDEV = 25% XOM, 75% MSFT
This is because mas significantly higher yung mga nasa MSFT and acquiring a large
share of this in the portfolio would contribute for the portfolio to have higher returns and higher
standard deviation.

#21 A
Asset 5 can go for as low as 10.5% as its return. This would still be higher from the single asset
accumulation by an amount of 438.755.

#21 B
The loss of the first two assets in the portfolio has little effect to the total accumulation of the
portfolio. The same also had a larger total from the single asset despite the loss of the two
assets.

#21 C
8% Return on single asset – this resulted to higher accumulation from the diversified portfolio.
6% Return on single asset – produced a still lower accumulation from the original one.
Observation – direct relationship si return and accumulation

#21 D
Plus 1% - higher accumulation
Less 1% - lower accumulation, lower than single asset
Observation – very sensitive to changes and a 1% change can be considered material

#21 E
Consistent observation – higher return, higher accumulation
^same observation for both diversified portfolio and singe asset
Stocks Valuation

Why study stocks if the net amount of stock issues is negative?

Kelan negative
Pagbili = assess ng risk and return
Share prices reflect
Corpo wealth creation = proce of share reflect expectations in terms of profitability
marketability ad management decision
Check the people imbes na yung share price

Why should investors consider common stock as an investment vehicle if they have a long-term
time horizon?
Debt – may maturity date, si stock wala
Shares – vehcle to have long term time horizon
^kasi forever siya

Why does dividend income growth exceed that of bond income growth over a period of time?
Bond income is limited as to the interest rate
-hanggang doon lang, me hangganan

Dividend kasi based on income so si income fluctuating so hindi siya contrained sa

predetermined rate