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