Boundless Lecture Slides Available on the Boundless Teaching

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Boundless Teaching Platform Boundless empowers educators to engage their students with affordable, customizable textbooks and intuitive teaching tools. The free Boundless Teaching Platform gives educators the ability to customize textbooks in more than 20 subjects that align to hundreds of popular titles. Get started by using high quality Boundless books, or make switching to our platform easier by building from Boundless content pre-organized to match the assigned textbook. This platform gives educators the tools they need to assign readings and assessments, monitor student activity, and lead their classes with pre-made teaching resources. Using Boundless Presentations The Appendix The appendix is for you to use to add depth and breadth to your lectures. You can simply drag and drop slides from the appendix into the main presentation to make for a richer lecture experience. Get started now at: http: //boundless. com/teaching-platform Free to edit, share, and copy Feel free to edit, share, and make as many copies of the Boundless presentations as you like. We encourage you to take these presentations and make them your own. If you have any questions or problems please email: educators@boundless. com Free to share, print, make copies and changes. Get yours at www. boundless. com

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Introduction to Risk and Return Understanding Return Portfolio Considerations The Impact of News of Expected Returns Risk Implications Across Portfolios Introduction to Risk and Return Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return (continued) Diversification Understanding the Security Market Line Introduction to Risk and Return Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return > Understanding Return • Expected Return • Variance Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/understanding-return-76/

Introduction to Risk and Return > Portfolio Considerations • Portfolio Diversification and Weighting • Implications for Expected Returns • Implications for Variance Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/portfolio-considerations-77/

Introduction to Risk and Return > The Impact of News of Expected Returns • Surprises and Returns • Announcements, News, and Returns Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/the-impact-of-news-of-expected-returns-78/

Introduction to Risk and Return > Risk • Types of Risk • Measuring Risk Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/risk-79/

Introduction to Risk and Return > Implications Across Portfolios • Calculating Expected Portfolio Returns • Portfolio Risk • Beta Coefficient for Portfolios Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/implications-across-portfolios-80/

Introduction to Risk and Return > Diversification • Impact of Diversification on Risk and Return: Unsystematic Risk • Impact of Diversification on Risk and Return: Systematic Risk Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/diversification-81/

Introduction to Risk and Return > Understanding the Security Market Line • Expected Risk and Risk Premium • Defining the Security Market Line • Impact of the SML on the Cost of Capital Free to share, print, make copies and changes. Get yours at www. boundless. com/finance/textbooks/boundless-finance-textbook/introduction-to-risk-and-return-8/understanding-the-security-market-line-82/

Appendix Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return Key terms • beta Average sensitivity of a security's price to overall securities market prices. • beta In finance, the Beta (β) of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. • capital asset pricing model In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's nondiversifiable risk. • Co-Variance In probability theory and statistics, co-variance is a measure of how much two random variables change together. • Correlation Matrix A matrix that shows a set of correlations between two random variables over a number of observations. • diversifiable risk the potential for loss which can be removed by investing in a variety of assets • expected return The expected return of a potential investment can be computed by computing the product of the probability of a given event and the return in that case and adding together the products in each discrete scenario. • expected value The expected value of a random variable is the weighted average of all possible values that this random variable can take on. • inflation An increase in the general level of prices or in the cost of living. • line of credit source of debt extended to a government, business or individual by a bank or other financial institution • market risk the potential for loss due to movements in prices in a system of exchange • market risk premium the amount by which expected rate of return of the exchange system exceeds the risk-free interest rate Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return • mergers and acquisitions Mergers and acquisitions (M&A) is an aspect of corporate strategy, corporate finance, and management dealing with the buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity, or using a joint venture. • Normalized variable In statistics, a normalized variable is one that is calculated using a ratio of itself and some benchmark figure. Normalized figures tend to be smaller than the original values. • portfolio The group of investments and other assets held by an investor. • risk The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. • Risk free rate Risk-free interest rate is theoretical rate of return of an investment with no risk of financial loss. • security market line Security market line (SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk (its beta). • standard deviation The standard deviation of an investment is obtained by taking the square root of the variance. It has a more straightforward meaning than variance. It tells you that in a given year, you can expect an investment's return to be one standard deviation above or below the average rate of return. • Strategic Asset Allocation The primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon. • systematic risk systematic or non-diversifiable risk is a term given to the portion of risk in a portfolio that cannot be diversified away by holding a pool of individual assets and therefore commands a return in excess of the risk-free-rate. • systematic risk The risk associated with an asset that is correlated with the risk of asset markets generally, often measured as its beta. • systemic risk Refers to the risk common to all securities which cannot be diversified away. • treasury bill Treasury bills (or T-Bills) mature in one year or less. They do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return • Unsystematic risk Unsystematic or diversifiable risk is a term given to the portion of risk in a portfolio that can be diversified away by holding a pool of individual assets. • Variable Rate Mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. • variance In finance, variance is a term used to measure the degree of risk in an investment. It is calculated by finding the average of the squared deviations from the mean rate of return. • weighted average In statistics, a weighted average is an average that takes each object and calculates the product of its weight and its figure and sums all of these products to produce one average. It is implied that all the individual weights add to 1. Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return Volatility begets volatility Data shown is from the period of Jan. 1990 -Sep. 2009. Volatility is measured as the standard deviation of S&P 500 one-day returns over a month's period. Free to share, print, make copies and changes. Get yours at www. boundless. com http: //Wikipedia. CC BY http: //Wikipedia View on Boundless. com

Introduction to Risk and Return Average Returns for Different Weighting Schemes Different returns are expected for different asset allocations given historical averages Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Asset allocation. " GNU FDL http: //en. wikipedia. org/wiki/Asset_allocation View on Boundless. com

Introduction to Risk and Return How much do investors want to pay to have to take the good with the bad? Calculating variance is a 3 step process once expected return has been calculated. Calculate deviations from mean (blue), square the deviations (yellow), multiply the squared deviation by its original probability (orange). Get brownie points by taking the square root of that number and interpret its meaning in the form of a sentence. Free to share, print, make copies and changes. Get yours at www. boundless. com Amazon Web Services. "Boundless. " CC BY http: //s 3. amazonaws. com/figures. boundless. com/506 a 72 c 8 e 4 b 07532 c 0 c 115 cc/variance. png View on Boundless. com

Introduction to Risk and Return The Security Market Line Diversification theory says that the only risk that earns a risk premium is that which can't be diversified away. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Sec. Mkt. Line. " GNU FDL http: //en. wikipedia. org/wiki/File: Sec. Mkt. Line. png View on Boundless. com

Introduction to Risk and Return The Security Market Line The location of a financial instrument above, below, or on the security market line will lead to consequences for a company's cost of capital. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Sec. Mkt. Line. " GNU FDL http: //en. wikipedia. org/wiki/File: Sec. Mkt. Line. png View on Boundless. com

Introduction to Risk and Return Beta is a measure that relates the rate of return of an asset, ra, with the rate of return of a benchmark, rb. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Beta (finance). " GNU FDL http: //en. wikipedia. org/wiki/Beta_(finance) View on Boundless. com

Introduction to Risk and Return World countries Standard & Poor's ratings An example of the credit ratings prescribed by Standard & Poor's as a result of their respective long-term liability analysis for debt issued at the national government level. Countries issue debt to build national infrastructure. Look how expensive it is to raise capital for such projects based on geographic region. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "World countries Standard & Poor's ratings. " CC BY http: //en. wikipedia. org/wiki/File: World_countries_Standard_&_Poor's_ratings. svg View on Boundless. com

Introduction to Risk and Return Care to roll the dice? Is a bet that doesn't always pay out, but pays out big when it does a good bet? Is playing the lottery a good bet? Would it be a good bet if tickets were only $0. 10 instead of $1. 00? Free to share, print, make copies and changes. Get yours at www. boundless. com Amazon Web Services. "Boundless. " CC BY http: //s 3. amazonaws. com/figures. boundless. com/506 a 7048 e 4 b 07532 c 0 c 115 ba/betting+outcomes. png View on Boundless. com

Introduction to Risk and Return Illustration of Modern Portfolio Theory Diversifying asset classes can reduce portfolio variance without diminishing expected return Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Markowitz frontier. " CC BY-SA http: //en. wikipedia. org/wiki/File: Markowitz_frontier. jpg View on Boundless. com

Introduction to Risk and Return Diversified Portfolio Asset classes and their weightings for a particular portfolio Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Asset allocation. " GNU FDL http: //en. wikipedia. org/wiki/Asset_allocation View on Boundless. com

Introduction to Risk and Return The Security Market Line This is an example of a security market line graphed. The y-intercept of this line is the risk-free rate (the ROI of an investment with beta value of 0), and the slope is the premium that the market charges for risk. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY http: //upload. wikimedia. org/wikipedia/en/d/d 9/Sec. Mkt. Line. png View on Boundless. com

Introduction to Risk and Return Variance of any portfolio The formula shows that the overall variance in a portfolio is the sum of each individual variance along with the cross-asset correlations. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Modern portfolio theory. " CC BY http: //en. wikipedia. org/wiki/Modern_portfolio_theory%23 Risk_and_expected_return View on Boundless. com

Introduction to Risk and Return Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. "Inflation. " Public domain http: //commons. wikimedia. org/wiki/File: Inflation. png View on Boundless. com

Introduction to Risk and Return An empirical example relating diversification to risk reduction In 1977 Elton and Gruber worked out an empirical example of the gains from diversification. Their approach was to consider a population of 3, 290 securities available for possible inclusion in a portfolio, and to consider the average risk over all possible randomly chosen n-asset portfolios with equal amounts held in each included asset, for various values of n. Their results are summarized in the following table. It can be seen that most of the gains from diversification come for n≤ 30. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Diversification (finance). " GNU FDL http: //en. wikipedia. org/wiki/Diversification_(finance) View on Boundless. com

Introduction to Risk and Return The equation that defines the security market line. Look at the equation and remember that old formula of a line: y = mx + b. In this case it looks rearranged, like y = b + mx, but the real question is what do the slope and y-intercept actually represent? Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "Security market line. " CC BY http: //en. wikipedia. org/wiki/Security_market_line View on Boundless. com

Introduction to Risk and Return A Fruitful Portfolio How would you calculate the expected return on this portfolio? Free to share, print, make copies and changes. Get yours at www. boundless. com Amazon Web Services. "Boundless. " CC BY http: //s 3. amazonaws. com/figures. boundless. com/508 a 73 c 2 e 4 b 045275 e 7845 ee/expected+return. png View on Boundless. com

Introduction to Risk and Return Calculating Beta Two hypothetical portfolios; what do you think each Beta value is? Free to share, print, make copies and changes. Get yours at www. boundless. com Amazon Web Services. "Boundless. " CC BY http: //s 3. amazonaws. com/figures. boundless. com/508 c 7229 e 4 b 0 e 81 b 6 cfe 4 ea 6/betacoefficientt. png View on Boundless. com

Introduction to Risk and Return Attribution • Wikipedia. "Fundamental analysis. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Fundamental_analysis • Wikipedia. "Technical analysis. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Technical_analysis • Wiktionary. "beta. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/beta • Wikipedia. "Fundamental analysis. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Fundamental_analysis • Wikipedia. "mergers and acquisitions. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/mergers%20 and%20 acquisitions • Wikipedia. "Public company. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Public_company • Wikipedia. "Technical analysis. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Technical_analysis • Wikipedia. "Interest. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Interest • Wikipedia. "Beta (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Beta_(finance) • Wikipedia. "Risk aversion. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk_aversion • Wikipedia. "Risk-return spectrum. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk-return_spectrum • Wiktionary. "systematic risk. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/systematic_risk • Wiktionary. "inflation. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/inflation • Wikibooks. "Real Estate Financing and Investing/Understanding Return and Risk. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Real_Estate_Financing_and_Investing/Understanding_Return_and_Risk%23 Risk_and_the_Risk. Return_Trade_Off • Wikipedia. "Security market line. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Security_market_line • Wikipedia. "Diversification (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Diversification_(finance) • Wikipedia. "Market risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Market_risk Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return • Wiktionary. "security market line. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/security_market_line • Wiktionary. "line of credit. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/line_of_credit • Wikipedia. "Risk premium. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk_premium • Wiktionary. "beta. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/beta • Wikipedia. "Unsystematic risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Unsystematic%20 risk • Wikipedia. "Diversification (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Diversification_(finance) • Wikipedia. "Expected value. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Expected_value • Wiktionary. "expected value. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/expected_value • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//finance/definition/expected-return--2 • Wikipedia. "Expected return. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Expected_return • Wikipedia. "systemic risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/systemic%20 risk • Wikipedia. "Asset classes. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Asset_classes%23 Asset_classes • Wikipedia. "Modern portfolio theory. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Modern_portfolio_theory • Wikipedia. "Stock market crash. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Stock_market_crash • Wikipedia. "Financial risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Financial_risk • Wikipedia. "Variable Rate Mortgage. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Variable%20 Rate%20 Mortgage • Wikipedia. "Expected shortfall. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Expected_shortfall Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return • Wikipedia. "Security market line. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Security_market_line • Wikipedia. "capital asset pricing model. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/capital%20 asset%20 pricing%20 model • Wikipedia. "Capital asset pricing model. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Capital_asset_pricing_model • Wikipedia. "Beta (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Beta_(finance) • Wikipedia. "Normalized variable. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Normalized%20 variable • Wikipedia. "Co-Variance. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Co-Variance • Wikipedia. "Modern portfolio theory. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Modern_portfolio_theory • Wiktionary. "portfolio. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/portfolio • Wiktionary. "risk. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/risk • Wiktionary. "weighted average. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/weighted_average • Wikipedia. "Modern portfolio theory. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Modern_portfolio_theory • Wikipedia. "Expected return. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Expected_return • Wikipedia. "Risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk • Wikipedia. "Security market line. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Security_market_line • Wikipedia. "Risk-free interest rate. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk-free_interest_rate • Wikipedia. "Beta (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Beta_(finance) • Wikipedia. "Systemic risk. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Systemic_risk • Wikipedia. "Risk free rate. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk%20 free%20 rate • Wikipedia. "treasury bill. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/treasury%20 bill Free to share, print, make copies and changes. Get yours at www. boundless. com

Introduction to Risk and Return • Wikipedia. "Risk premium. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Risk_premium • Wikipedia. "variance. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/variance • Wiktionary. "standard deviation. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/standard_deviation • Wikipedia. " CC BY-SA 3. 0 http: //www. wikipedia. org • Wikipedia. "Strategic Asset Allocation. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Strategic%20 Asset%20 Allocation • Wikipedia. "Modern portfolio theory. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Modern_portfolio_theory • Wikipedia. "Asset allocation. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Asset_allocation • Wikipedia. "Diversification (finance). " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Diversification_(finance) • Wiktionary. "systematic risk. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/systematic_risk • Wikipedia. "Covariance and correlation. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Covariance_and_correlation • Wikipedia. "Correlation Matrix. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Correlation%20 Matrix • Wikipedia. "Asset allocation. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Asset_allocation • Wikipedia. "Stock market downturn of 2002. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Stock_market_downturn_of_2002 Free to share, print, make copies and changes. Get yours at www. boundless. com