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    6 Terminology

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    nylaksingh
    This document discusses expected and unexpected returns on stocks and their composition. It also discusses: 1) Expected returns depend on known information about a stock, while unexpected returns come from new revelations that are uncertain. 2) Risk can be systematic, influenced by broad market forces, or unsystematic, specific to an individual asset. 3) Diversification reduces unsystematic risk but not systematic risk. The market only rewards risks that cannot be diversified away, namely systematic risk.

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    6 Terminology

    Uploaded by

    nylaksingh
    4 views8 pages
    This document discusses expected and unexpected returns on stocks and their composition. It also discusses: 1) Expected returns depend on known information about a stock, while unexpected returns come from new revelations that are uncertain. 2) Risk can be systematic, influenced by broad market forces, or unsystematic, specific to an individual asset. 3) Diversification reduces unsystematic risk but not systematic risk. The market only rewards risks that cannot be diversified away, namely systematic risk.

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    2FA3 Chapter 6 (13) terminology

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    6 terminology

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    This document discusses expected and unexpected returns on stocks and their composition. It also discusses: 1) Expected returns depend on known information about a stock, while unexpected returns come from new revelations that are uncertain. 2) Risk can be systematic, influenced by broad market forces, or unsystematic, specific to an individual asset. 3) Diversification reduces unsystematic risk but not systematic risk. The market only rewards risks that cannot be diversified away, namely systematic risk.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views8 pages

    6 Terminology

    Uploaded by

    nylaksingh
    This document discusses expected and unexpected returns on stocks and their composition. It also discusses: 1) Expected returns depend on known information about a stock, while unexpected returns come from new revelations that are uncertain. 2) Risk can be systematic, influenced by broad market forces, or unsystematic, specific to an individual asset. 3) Diversification reduces unsystematic risk but not systematic risk. The market only rewards risks that cannot be diversified away, namely systematic risk.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 8

    XPECTED UNEXPECTEDRETURNS

    he Return on Any stock traded in a FinancialMarketis composed of 2 Parts

    Expected Normal Return what shareholderspredict orExpect


    The ReturnDepends on Informationshareholdershaveabout the stock t is based on the Marketsunderstanding
    Today of the important Factors that will influence the stock

    on ExpectedReturn uncertain orRiskypart


    portion that comes from un ExpectedInformationRevealed unexpected GDPFigures
    un expectedinterestRatechanges
    CompanysResultsHigherthanexpected

    In a Given year the Un ExpectedReturn Can be positive or Negative


    But through time the Average value of un ExpectedReturn will be Zero meaning on Average the ActualRet
    Equals the ExpectedReturn

    SYSTEMATIC UNSYSTEMATIC RISK


    Total Return Expected Return t un ExpectedReturn

    Systematic Risk Un Systematic Risk


    An un ExpectedRisk that ed Risk that influences
    influences alargeNumberof single or small Group of Assets
    Assets union strike Lawsuit
    GDP inflation Earningssuprise
    interest rate

    I I
    Ifigidonimorassetspectic
    Distinction Never Really
    is the as

    I ERSIFICATION PORTFOLIORISK
    V

    A portfolioRiskDoes Notimply that the Risk about a specificstock within thatportfolio is the same

    To Illustrate theRealation
    shipbetweenportfolio size portfolioRisk
    plotting the Standard Deviation Of ReturnVersus the Number of stocks in thePortfolio
    SYSTEMATIC RISK PRINCIPLE
    The Reward for BearingRiskDependsonly on the systematic Risk of an Investment because
    Un SystematicRisk Can be Eliminated at virtually no cost ByDiversifying the MarketDoesNotRewardRis
    that are Borne un Necessarily

    The Expected Return on a AssetDepends only on that Assets systematic Risk

    No Matter How Much Total Risk an Asset has only the systematicportion is Relevant in Determining the
    Expected Return And the Risk premium on that Asset

    MEASURING SYSTEMATIC RISK VIA BETA

    However Not All Betas are Equal

    Differentproviders use somewhat Different Methods For Estimating Beta SignificantDifferences


    Sometimes occur
    As a Result its a Good idea to Look at Severalsources
    SECURITYMARKET LINE SML
    CAPITAL ASSET PRICING MODEL CAPM

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