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Презентация на тему Risk and Return

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Topics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAPM Alternatives
Principles of Corporate FinanceSeventh EditionRichard A. Brealey Stewart C. MyersSlides byMatthew WillChapter Topics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAPM Alternatives Markowitz Portfolio TheoryCombining stocks into portfolios can reduce standard deviation, below the Markowitz Portfolio TheoryPrice changes vs. Normal distributionMicrosoft - Daily % change 1990-2001 Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment A % probability% return Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment B % probability% return Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment C % probability% return Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment D % probability% return Markowitz Portfolio TheoryCoca ColaReebokStandard DeviationExpected Return (%)35% in Reebok Expected Efficient FrontierStandard DeviationExpected Return (%)Each half egg shell represents the possible weighted Efficient FrontierStandard DeviationExpected Return (%)Lending or Borrowing at the risk free rate Efficient FrontierExample Efficient FrontierExample Efficient FrontierExample Efficient FrontierExample Efficient FrontierABReturnRisk (measured as σ) Efficient FrontierABReturnRiskAB Efficient FrontierABNReturnRiskAB Efficient FrontierABNReturnRiskABABN Efficient FrontierABNReturnRiskABGoal is to move up and left. WHY?ABN Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return Efficient FrontierReturnRiskABNABABN Security Market LineReturnRisk.rfRisk Free Return =Efficient Portfolio Security Market LineReturn.rfRisk Free Return =Efficient PortfolioBETA1.0 Security Market LineReturn.rfRisk Free Return =BETASecurity Market Line (SML) Security Market LineReturnBETArf1.0SMLSML Equation = rf + B ( rm - rf ) Capital Asset Pricing Model R = rf + B ( rm - rf )CAPM Testing the CAPMAvg Risk Premium 1931-65Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium Testing the CAPMAvg Risk Premium 1966-91Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium Testing the CAPMHigh-minus low book-to-marketReturn vs. Book-to-MarketDollarsLow minus bighttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html Consumption Betas vs Market BetasStocks (and other risky assets)Wealth = marketportfolio Arbitrage Pricing Theory Alternative to CAPMExpected Risk Arbitrage Pricing TheoryEstimated risk premiums for taking on risk factors(1978-1990)
Слайды презентации

Слайд 2 Topics Covered
Markowitz Portfolio Theory
Risk and Return Relationship
Testing the

Topics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAPM Alternatives

CAPM
CAPM Alternatives

Слайд 3 Markowitz Portfolio Theory
Combining stocks into portfolios can reduce

Markowitz Portfolio TheoryCombining stocks into portfolios can reduce standard deviation, below

standard deviation, below the level obtained from a simple

weighted average calculation.
Correlation coefficients make this possible.
The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.

Слайд 4 Markowitz Portfolio Theory
Price changes vs. Normal distribution
Microsoft -

Markowitz Portfolio TheoryPrice changes vs. Normal distributionMicrosoft - Daily % change

Daily % change 1990-2001
Proportion of Days
Daily %

Change

Слайд 5 Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment A

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment A % probability% return


% probability
% return

Слайд 6 Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment B

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment B % probability% return


% probability
% return

Слайд 7 Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment C

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment C % probability% return


% probability
% return

Слайд 8 Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment D

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment D % probability% return


% probability
% return

Слайд 9 Markowitz Portfolio Theory

Coca Cola
Reebok
Standard Deviation
Expected Return (%)
35% in

Markowitz Portfolio TheoryCoca ColaReebokStandard DeviationExpected Return (%)35% in Reebok Expected

Reebok


Expected Returns and Standard Deviations vary

given different weighted combinations of the stocks

Слайд 10 Efficient Frontier
Standard Deviation
Expected Return (%)
Each half egg shell

Efficient FrontierStandard DeviationExpected Return (%)Each half egg shell represents the possible

represents the possible weighted combinations for two stocks.
The composite

of all stock sets constitutes the efficient frontier

Слайд 11 Efficient Frontier


Standard Deviation
Expected Return (%)
Lending or Borrowing at

Efficient FrontierStandard DeviationExpected Return (%)Lending or Borrowing at the risk free

the risk free rate (rf) allows us to exist

outside the efficient frontier.

rf

Lending Borrowing

T

S

Слайд 12 Efficient Frontier
Example

Efficient FrontierExample Correlation Coefficient =

Correlation Coefficient =

.4
Stocks σ % of Portfolio Avg Return
ABC Corp 28 60% 15%
Big Corp 42 40% 21%


Standard Deviation = weighted avg = 33.6
Standard Deviation = Portfolio = 28.1
Return = weighted avg = Portfolio = 17.4%

Слайд 13 Efficient Frontier
Example

Efficient FrontierExample Correlation Coefficient =

Correlation Coefficient =

.4
Stocks σ % of Portfolio Avg Return
ABC Corp 28 60% 15%
Big Corp 42 40% 21%


Standard Deviation = weighted avg = 33.6
Standard Deviation = Portfolio = 28.1
Return = weighted avg = Portfolio = 17.4%

Let’s Add stock New Corp to the portfolio

Слайд 14 Efficient Frontier
Example

Efficient FrontierExample Correlation Coefficient =

Correlation Coefficient =

.3
Stocks σ % of Portfolio Avg Return
Portfolio 28.1 50% 17.4%
New Corp 30 50% 19%

NEW Standard Deviation = weighted avg = 31.80
NEW Standard Deviation = Portfolio = 23.43
NEW Return = weighted avg = Portfolio = 18.20%


Слайд 15 Efficient Frontier
Example

Efficient FrontierExample Correlation Coefficient =

Correlation Coefficient =

.3
Stocks σ % of Portfolio Avg Return
Portfolio 28.1 50% 17.4%
New Corp 30 50% 19%

NEW Standard Deviation = weighted avg = 31.80
NEW Standard Deviation = Portfolio = 23.43
NEW Return = weighted avg = Portfolio = 18.20%

NOTE: Higher return & Lower risk
How did we do that? DIVERSIFICATION

Слайд 16 Efficient Frontier
A
B
Return
Risk (measured as σ)

Efficient FrontierABReturnRisk (measured as σ)

Слайд 17 Efficient Frontier
A
B
Return
Risk
AB

Efficient FrontierABReturnRiskAB

Слайд 18 Efficient Frontier
A
B
N
Return
Risk
AB

Efficient FrontierABNReturnRiskAB

Слайд 19 Efficient Frontier
A
B
N
Return
Risk
AB
ABN

Efficient FrontierABNReturnRiskABABN

Слайд 20 Efficient Frontier
A
B
N
Return
Risk
AB
Goal is to move up and left.

Efficient FrontierABNReturnRiskABGoal is to move up and left. WHY?ABN

WHY?
ABN

Слайд 21 Efficient Frontier
Return
Risk
Low Risk
High Return
High Risk
High Return
Low Risk
Low Return
High

Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return

Risk
Low Return

Слайд 22 Efficient Frontier
Return
Risk
Low Risk
High Return
High Risk
High Return
Low Risk
Low Return
High

Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return

Risk
Low Return

Слайд 23 Efficient Frontier
Return
Risk
A
B
N
AB
ABN

Efficient FrontierReturnRiskABNABABN

Слайд 24 Security Market Line
Return
Risk
.
rf
Risk Free
Return =
Efficient

Security Market LineReturnRisk.rfRisk Free Return =Efficient Portfolio

Portfolio

Слайд 25 Security Market Line
Return
.
rf
Risk Free
Return =
Efficient

Security Market LineReturn.rfRisk Free Return =Efficient PortfolioBETA1.0

Portfolio
BETA
1.0

Слайд 26 Security Market Line
Return
.
rf
Risk Free
Return =
BETA
Security

Security Market LineReturn.rfRisk Free Return =BETASecurity Market Line (SML)

Market Line (SML)

Слайд 27
Security Market Line
Return
BETA
rf
1.0
SML
SML Equation = rf + B

Security Market LineReturnBETArf1.0SMLSML Equation = rf + B ( rm - rf )

( rm - rf )

Слайд 28
Capital Asset Pricing Model
R = rf +

Capital Asset Pricing Model R = rf + B ( rm - rf )CAPM

B ( rm - rf )
CAPM

Слайд 29 Testing the CAPM
Avg Risk Premium 1931-65
Portfolio Beta
1.0
SML
30

20

10

0










Investors
Market Portfolio

Beta

Testing the CAPMAvg Risk Premium 1931-65Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium

vs. Average Risk Premium

Слайд 30 Testing the CAPM
Avg Risk Premium 1966-91
Portfolio Beta
1.0
SML
30

20

10

0
Investors
Market Portfolio











Beta

Testing the CAPMAvg Risk Premium 1966-91Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium

vs. Average Risk Premium

Слайд 31 Testing the CAPM
High-minus low book-to-market
Return vs. Book-to-Market
Dollars
Low minus

Testing the CAPMHigh-minus low book-to-marketReturn vs. Book-to-MarketDollarsLow minus bighttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

big
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Слайд 32 Consumption Betas vs Market Betas
Stocks
(and other risky

Consumption Betas vs Market BetasStocks (and other risky assets)Wealth = marketportfolio

assets)
Wealth = market
portfolio

Слайд 33

Arbitrage Pricing Theory
Alternative to CAPM

Expected Risk

Arbitrage Pricing Theory Alternative to CAPMExpected Risk Premium =

Premium = r - rf


= Bfactor1(rfactor1 - rf) + Bf2(rf2 - rf) + …

Return = a + bfactor1(rfactor1) + bf2(rf2) + …
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