Risk and Return Selected Realised Returns Average Return

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Risk and Return

Risk and Return

Selected Realised Returns Average Return Standard Deviation หนสามญขอบรษทขนาดเลก 17. 3% 33. 2% หนสามญขอบรษทขนาดใหญ 12.

Selected Realised Returns Average Return Standard Deviation หนสามญขอบรษทขนาดเลก 17. 3% 33. 2% หนสามญขอบรษทขนาดใหญ 12. 7 20. 2 หนกระยะยาวของบรษท 6. 1 8. 6 หนกระยะยาวของรฐบาล 5. 7 9. 4 ตวเงนคลง 3. 9 3. 2 Source: Based on Stocks, Bonds, Bills, and Inflation: (Valuation Edition) 2002 Yearbook (Chicago: Ibbotson Associates, 2002), 28.

Risk and a single investment Consider 2 possible investments: 1. Investment in Treasury bill

Risk and a single investment Consider 2 possible investments: 1. Investment in Treasury bill which is a government security that mature in 90 days and promise to pay an annual of 6% 2. Investment in the stock of local company which the estimate of the annual returns will be Probability of Occurrence 10 % 20% 40% 20% 10% Rate of Return on Investment -10% 5% 15% 25% 40%

Risk and a single investment 1. 0 Treasury bill Stock of local company 0.

Risk and a single investment 1. 0 Treasury bill Stock of local company 0. 5 0. 4 0. 3 0. 2 0. 1 -10% 5% 15% 25% 40%

Measuring Risk Probability of Occurrence 10 % 20% 40% 20% 10% Rate of Return

Measuring Risk Probability of Occurrence 10 % 20% 40% 20% 10% Rate of Return on Investment -10% 5% 15% 25% 40% return : k = (. 10)(-10%) + (. 20)(5%) + (. 40)(15%) + (. 10)(40%) = 15 % 1/2 risk : SD = ( -10% - 15%)2(. 10) + ( 5% - 15%)2(. 20) = 12. 85% + ( 15% - 15%)2(. 40) + ( 25% - 15%)2(. 20) + ( 40% - 15%)2(. 10)

Ex. Risk Averse plc. Which project to invest ? Project 1 Project 2 Project

Ex. Risk Averse plc. Which project to invest ? Project 1 Project 2 Project 3 Project 4 Project 5 Return Probability of return occurring 16 20 -16 36 48 -8 16 24 -40 0 100 1. 0 0. 25 0. 50 0. 25 0. 10 0. 60 0. 30

Risk Averse plc Return x Prob Project 1 Project 2 Project 3 16 x

Risk Averse plc Return x Prob Project 1 Project 2 Project 3 16 x 1. 0 20 x 1. 0 - 16 x 0. 25 = - 4 36 x 0. 50 = 18 48 x 0. 25 = 12 - 8 x 0. 25 = -2 16 x 0. 50 = 8 24 x 0. 25 = 6 -40 x 0. 10 = -4 0 x 0. 60 = 0 100 x 0. 30 = 30 Project 4 Project 5 Expected Returns 16 20 26 12 26

from question Project 1 Project 2 Project 3 1 2 3 4 5 return

from question Project 1 Project 2 Project 3 1 2 3 4 5 return probability expected return deviation 2 x prob sum Ri Pi R 16 20 -16 36 48 1. 00 0. 25 0. 50 0. 25 16 20 26 26 26 Ri-R (Ri-R)2 Pi ∑(Ri-R)2 Pi 0 0 - 42 10 22 0 0 1764 100 484 0 0 441 50 121 0 0 612 SD = 24. 7 Project 4 -8 16 24 0. 25 0. 50 0. 25 12 12 12 -20 4 12 400 16 144 100 8 36 144 SD = 12 Project 5 - 40 0 100 0. 10 0. 60 0. 30 26 26 26 -66 -26 74 4356 676 5476 436 406 1643 2485 SD = 49. 8

Risk Averse plc: Expected Return & Standard Deviation expected return standard deviation Project 1

Risk Averse plc: Expected Return & Standard Deviation expected return standard deviation Project 1 Project 2 Project 3 Project 4 Project 5 16 20 26 12 26 0 0 24. 7 12 49. 8

Make a decision which project would be selected ? Expected Return (%) Project 2

Make a decision which project would be selected ? Expected Return (%) Project 2 Project 1 Project 3 Project 4 Standard deviation (Risk) Project 5

Make a decision which line would be selected ? I 1 or I 2

Make a decision which line would be selected ? I 1 or I 2 ? And why ? I 3 or I 4 ? Expected Return (%) I 1 I 2 I 3 I 4 Standard deviation (Risk)

Make a decision which project would be selected ? Expected Return (%) Project 2

Make a decision which project would be selected ? Expected Return (%) Project 2 Project 1 Project 3 Project 4 Standard deviation (Risk) Project 5

Unsystematic/ Systematic Risk Standard deviation (risk) Unsystematic / Diversiable / Firm-specific risk Total risk

Unsystematic/ Systematic Risk Standard deviation (risk) Unsystematic / Diversiable / Firm-specific risk Total risk Systematic / Undiversiable / Market-related risk 10 20 Number of stocks in portfolio

Definition Common concern Abstract Realised in communication RealisedDefinition Common concern Abstract Realised in communication Realised
PROCEDURE average 100 INTERFACE RETURNS average total inputPROCEDURE average 100 INTERFACE RETURNS average total input
Average Arithmetic and Average Quadratic Deviation Average ArithmeticAverage Arithmetic and Average Quadratic Deviation Average Arithmetic
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