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19th April Lecture
19th April Lecture
Risk and
Return
LG5 Review the two types of risk and the derivation and
role of beta in measuring the relevant risk of both a
security and a portfolio.
where
rt = actual, expected, or required rate of return during period t
Ct = cash (flow) received from the asset investment in the time
period t – 1 to t
Pt = price (value) of asset at time t
Pt – 1 = price (value) of asset at time t – 1
where
rj = return for the jth outcome
Prt = probability of occurrence of the jth outcome
n = number of outcomes considered
1. Actual Return
2. Expected Return
3. Standard Deviation
4. Coefficient of Variation
where
wj = proportion of the portfolio’s total
dollar value represented by asset j
rj = return on asset j