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CH 07
CH 07
Finance, 2/e
P CF1 P CF1
Rt Rca Ri (7.1)
P0 P0 P0
Quantitative Measures of Return
o TOTAL HOLDING PERIOD RETURN EXAMPLE
• Ella buys a stock for $26.00. After one year, the
stock price is $29.00 and she receives a dividend
of $0.80. What is her return for the period?
P CF1
Rt Rca Ri
P0
($29.00 $26) $0.80
$26.0
$3.8
14.62%
$26.00
IMPORTANT
n
E ( Rasset ) ( pi Ri ) ( p1 R1 ) ( p2 R2 ) ... ( pn Rn ) (7.2)
i 1
Quantitative Measures of Return
o EXPECTED RETURN EXAMPLE
• There is 30% chance the total return on Dell
stock will be -3.45%, a 30% chance it will be
+5.17% , a 30% chance it will be +12.07% and
a 10% chance that it will be +24.14%. Calculate
the expected return.
E (R ) .30 ( 0.0345) (.30 0.0517)
Dell
(R ) i
R1 R2 R3 ... Rn
E ( Rasset ) i 1
n n
Variance (phương sai) and Standard
Deviation (độ lệch tiêu chuẩn)
as Measures of Risk
CALCULATE VARIANCE
1. Square the difference between each possible
outcome and the mean
2. Multiply each squared difference by its
probability of occurring
3. Add
n
Var ( R ) R2 pi Ri E ( R)
2
(7.3)
i 1
Variance and Standard Deviation
as Measures of Risk
o CALCULATE VARIANCE
• If all possible outcomes are equally likely, the
formula becomes
n
R E ( R)
2
i
2
R
i 1
n
Variance and Standard Deviation
as Measures of Risk
o CALCULATE STANDARD DEVIATION
• Standard deviation is the square root of the
variance
2
R
Variance and Standard Deviation
as Measures of Risk
o VARIANCE AND STANDARD DEVIATION
• Variance and Standard Deviation for Dell Stock
2
Dell
.30 (0.0345 .0655) 2 .30 (0.0517 0.0655) 2
.30 (0.1207 0.0655) .10 (0.2414 0.0655)
2 2
Exhibit 7.5
IMPORTANT
E ( Ri ) Rrf
Sharpe Ratio S (7.5)
Ri
IMPORTANT
E (R Portfolio
) x E (R ) x E (R )
1 1 2 2
Risk and Diversification
o PORTFOLIOS WITH MORE THAN ONE ASSET
• Expected return for portfolio made up of
multiple assets
E (R ) ( x E (R ) ( x E (R ) ( x E (R ) ...
n
Portfolio i 1 i i 1 1 2 2
( x E (R )
n n
( 7.6 )
Risk and Diversification
o EXPECTED RETURN FOR PORTFOLIO EXAMPLE
• A portfolio consists of $100,000 in Treasury bills
that yield 4.5%; $150,000 in Proctor and
Gamble stock with an expected return of 7.5%;
and $150,000 in Exxon Mobil stock with an
expected return of 9.0%. What is the expected
return for this $400,000 portfolio?
Risk and Diversification
o EXPECTED RETURN FOR PORTFOLIO EXAMPLE
$100,000
x TB 0.25
$400,000
$150,000
x P&G x EM 0.375
$400,000
E ( RPortfolio) (0.25 0.045) (0.375 0.075) (0.375 0.90)
0.0731or 7.3%
Monthly Returns for Netflix &
Southwest Airlines (1 of 2)
Exhibit 7.6
Monthly Returns for Netflix &
Southwest Airlines (2 of 2)
Exhibit 7.7
Risk and Diversification
o PORTFOLIOS WITH MORE THAN ONE ASSET
• When stock prices move in opposite directions,
the price change of one stock offsets some of the
price change of another stock
Risk and Diversification
o PORTFOLIOS WITH MORE THAN ONE ASSET
• Risk for a portfolio of two stocks is less than the
average of the risks associated with the
individual stocks. The portfolio’s risk is
E(R ) R E(R ) – R
i rf i m rf
Compensation for Bearing Systematic Risk
E(R i ) R rf i (E(R m ) – R rf )
0.04 1.500.10 - 0.04
0.13 or 13%
Compensation for Bearing Systematic Risk
P CF
E (R ) 1
P
T
0
Compensation for Bearing Systematic Risk
Exhibit 7.11 The Security Market Line
Compensation for Bearing Systematic Risk