Uncertainty, expected utility theory and the market for risk david autor 14. The expected return is the uncertain future return that a firm expects to get from its project. The first part of the notes applies to this lecture and the second part of the notes applies to lecture 8. In other words, what might have been a positive npv project, when. Mostly large size organizations maintains portfolio of their different investments and. The concept of a term structure of the riskreturn tradeoff is conceptually appealing but, strictly speaking, is only valid for buyandhold investors who make a onetime asset allocation decision and are interested only in the assets available for spending at the end of a particular horizon. Find materials for this course in the pages linked along the left. An example of an uncertainty measure also often used, which may be. In this article we discuss the concepts of risk and returns as well as the relationship between them. Yale university october 31, 2010 1 the neoclassical benchmark in these notes, we discuss a dynamic stochastic general equilibrium dsge economy with complete markets. The probability density function pdf of the normal. In this lecture, were going to actually look at some real data. The term risk and return refers to the potential financial loss or gain experienced through investments in securities.
A large body of literature has developed in an attempt to answer these questions. Thispresentationisavailablefreefor noncommercialusewithatribution. Mathematical modeling and statistical methods for risk. Variance is calculated by subtracting the average return from each individual return, squaring that figure, summing the squares across all observations, and dividing the sum by the number of observations. Lecture 4riskreturnstatistics lecture 4 investments. Toxicology curriculum for communities trainers manual. The notes, that can be downloaded pdf, are in french, and will be used at the jes journees detudes statistiques, organised at the cirm mentioned here. Systematic risk and unsystematic risk are the two components of total risk.
Pogue1 today, most students of financial management would agree that the treatment of risk is the main element in financial decision making. Lecture 6risk and return authorstream presentation. Thus the set of ordered basis of rn are in onetoone correspondence with elements of gln, and so we may partition them into two subsets. If there was no risk, there would be no return to the ability to successfully manage it. But in all cases, the basic issues to consider include identifying what asset needs to be protected and the nature of associated threats and vulnerabilities. Yale university november 26, 2010 1 introduction so far, we have focused on a complete market benchmark and studied its success and failure to match the data in several dimensions business cycles, asset pricing and. As early as 1956, simon argued that perception is a filter through which the decision maker views the objective environment ant its. More material on the topics presented in remaining chapters can be found in 8 chapters 57, 12 chapters 812 and articles found in the list of references at the end of these lecture notes. The capital allocation line cal is the plot of riskreturn combinations available by varying portfolio allocation between a riskfree asset and a risky portfolio. Financial econometrics hebrew university of jerusalem. Lecture 7 assetliability management gap or repricing. Prerequisites merton model, 1973 leland model, 1994 merton model main results merton model main results the value of the debt debt value at t0 using the risk neutral probability the value of the debt issued at t 0 is equal to the expected discounted cash. An introduction to risk and return concepts and evidence by franco modigliani and gerald a.
Risk and return lecture notes in introduction to corporate. The value of the portfolio at maturity of the notes will be identical with the predicted value. Lecture notes on economics of financial risk management1 xiaodong zhu2 march 20, 2011 1incomplete draft for class uses only. Lecture overview risk and return measuring returns volatility portfolios diversification risk premium capm summary2. For example, an international bond is valued using the same npv formulas used to value a domestic bond. Inflation the determinants of interest rates the quoted nominal interest rate on a debt security is composed of a real risk free rate, r, plus several risk premiums risk premium. However, risk did not always have such a prominent place. In the previous lectures, you learned how to compute the average return, and the volatility of the return on a given asset. Apr 11, 2016 these are the lecture notes for bu 381 over expected return and risk.
Oct 05, 2016 risk and return analysis in financial management is related with the number of different uncorrelated investments in the form of portfolio. Risk and return financial management lecture notes docsity. Lecture notes macroeconomics econ 510a, fall 2010, yale university a neoclassical benchmark economy guillermo ordonez. Lecture notes on risk and insurance freakonometrics. Risk and return 1 class 9 financial management, 15. Corporate financial risk management, by dar rell du.
The chapters 14 in these lecture notes are based on the book 12 which we strongly recommend. Growers must decide between different alternatives with various levels of risk. View notes lecture 4 risk and return from fm 212 at lse. These lecturenotes cannot be copied andor distributed without permission.
The hypothesis that expected excess returns are zero is known as the uncovered interest parity hypothesis. Lecture notes insurance 1introduction need for insurance arises from uncertain income e. The risk premium cess returns are zero hodrick, 1987. Please do not circulate or cite without the authors permission. Class 9 financial management, 15 mit opencourseware. These are the lecture notes for bu 381 over expected return and risk. Exam be able to do problems similar to chapter 7 problems of 3, 5, 6, and 8 and understand relationships discussed in class or notes. Types of information collected and considered when performing the risk assessment pdf pdf icon 50 kb. I just finished some lectures notes on risk and insurance. Lecture notes 11 the risk premium american university.
Market risk this arises out of changes in demand and supply pressures in the markets, following the changing flow of information or expectations the totality of investor perception and subjective factors influence the events in the market which are unpredictable and give rise to risk, which is not controllable. Introduction a huge hole in our theory so far is that we have only modeled choices that are devoid of uncertainty. The realized return, on the contrary, is the certain return that a firm has actually earned. In what follows well define risk and return precisely, investigate the nature of their relationship, and find that there are ways to limit exposure to investment risk. Lecture notes, lectures 18 bafi3192 risk management. View notes lecture 4riskreturnstatistics from finance investment at london business school. Module three lecture notes toxicology curriculum for. Svetlozar rachev university of karlsruhe lecture 6. Are they remunerated in a way that encourages imprudent risk taking, or are risk management policies reflected in remuneration schemes. Lecture 4riskreturnstatistics lecture 4 investments risk. By learning about and using these tools, crop and livestock producers can build the confidence needed to deal with risk and exciting opportunities of the future. It can also be defined as the probability that a health effect will occur after an individual has been exposed to a specified amount of a hazard. The square root of the variance, called the standard deviation or the volatility, can be used to estimate risk.
How can we estimate the rate of return investors require for projects with this risk level. Independent defaults lead to unrealistic loss scenarios we conclude that the independence assumption, or more. Semistandard deviation the semistandard deviationis a measure of dispersion which. The probability density function pdf of the normal distribution for a random variable r takes the form 1 2 2. Risk and return this chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. The collection of multiple investments is referred to as portfolio. Lecture notes on economics of financial risk management. The risk premium in this chapter we explore the nature and sources of currency risk, and we characterize portfolio choice behavior in the presence of currency risk. In some cases, this is a special type of instrument which is retained by the originator as a potential profit flow.
This guide establishes principles of risk management, and the risk management assessment framework1 provides a means of assessing the maturity of risk management. This means that the rate of return demanded by outside bond investors may include an extra risk premium for the information that they do not hold. The capm also applies to japanese or mexican stocks. Accordingly, one needs to determine the consequences of a security. Guidance notes on risk assessment applications for the. Lecture notes macroeconomics econ 510a, fall 2010, yale university limited commitment. By learning about and using these tools, crop and livestock producers can build the confidence needed to deal with risk and.
Inflation the determinants of interest rates the quoted nominal interest rate on a debt security is composed of a real riskfree rate, r, plus several risk premiums risk premium. Risk and return risk and return over a century of capital market history measuring portfolio risk calculating portfolio risk. Risk and return analysis in financial management is related with the number of different uncorrelated investments in the form of portfolio. The two basic questions that every risk and return model in finance tries to answer are. In the extreme version, the equity class receives no coupon either. Judy lewent and john kearney, identifying measuring and hedg ing currency risk at merck, journal of applied corporate finance, vol 2, 1990, pp. First, risk is defined as the probability that an event will occur. Environmental protection agency, risk assessment guidelines and information directory, government institute, rockville, md. Abs guidance notes on risk assessment 2000 3 chapter 1 introduction section 1 purpose this document is intended to provide an overview of the risk assessment field for managers and technical professionals in the maritime and offshore oil and gas industries.
Organisations may choose to adopt particular standards for. During these meeting s, the fundamental pl ans for performing ris k management activities will be discussed and. University of toronto department of computer science. Total risk the total variability in returns of a security represents the total risk of that security.
The most junior class often called the equity class is the most exposed to payment risk. Prior to 1952 the risk element was usually either assumed away or treated qualitatively in the financial literature. View notes lecture 4 risk return statistics from finance investment at london business school. The risk is the likelihood the investor could lose money if an investor decides to invest in a security that has a relatively low risk, the potential return on that investment is typically fairly small. Currency risk is the risk one incurs due to the currency denomination of ones portfolio. Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns to a portfolio of investments. Portfolio theory the portfolio return is a weighted average of the individual returns. Previous notes on risk measures pdf and copulas pdf. Financial econometrics lecture notes professor doron avramov the hebrew university of jerusalem. An introduction to risk and return concepts and evidence by.
The capital market line cml is the cal using the market index portfolio as the risky asset. Key current questions involve how risk should be measured, and how the. This handbook is designed to improve the risk management skills of american farmers and ranchers. Uncertainty, expected utility theory and the market. If we base the analysis on the standard deviation and the expected return, we would conclude that both x and y have equal. Lecture 4 risk and return lecture 4 risk and return risk. These notes and accompanying spreadsheets are preliminary and incomplete and they are not guaranteed to be free of errors.
929 57 620 350 639 1011 1279 1246 1331 1447 1269 280 295 513 1341 834 632 368 1395 1417 309 1424 1259 318 198 947 414 349 98 1470 160 155 785 704 1199 1245 118 956 1478 1392