Continuation

It
measures the
dispersion of
data points
around the mean
 represents
the ratio of a data group's
standard deviation
to its mean
WHY IS THIS SIGNIFICANT?
The lower the ratio, the better the risk
return trade-off.
 Gusto ko sa pinaka
gamay ug risk
hehehe

STOCK A STOCK B BOND C

11% 15% 16% 19% 6% 10%

0.73 0.84 0.60
 Portfolio risks
are in relation with the
total risks of the portfolio,
which consists of the
systematic and
unsistematic risk
 It is the
weighted average
of the assets in
the portfolio
 The
correlation coefficient (ρ)
measures the degree
of relationship between
the assets in the
portfolio
Assume that Simba Corporation invested in two stocks, Stock A
and B, which both have a correlation of 0.60. Compute for the
portfolio return and portfolio risk.
Stock A (70%) Holding Period Returns Stock b (30%) Holding Period Returns

11-Jan-13 3.23 9.48

11-Feb-13 3.30 2.17% 9.40 -0.084%
11-Mar-13 3.27 -0.91% 9.50 1.06%
11-Apr-13 3.22 -1.53% 9.85 3.68%
11-May-13 3.45 7.14% 9.72 -1.32%
11-Jun-13 3.46 0.29% 9.80 0.82%
11-Jul-13 3.16 -8.67% 9.76 -0.41%
11-Aug-13 3.08 -2.53% 9.85 0.92%
11-Sep-13 3.03 -1.63% 10.20 3.55%
11-Oct-13 2.50 17.49% 10.45 2.45%
11-Nov-13 2.25 -10.00% 11.25 7.66%
11-Ded-13 2.00 -11.11% 11.50 2.22%
Average Return -4.02% 1.80%
Standard Deviation 7.30% 2.56%
 Diversification
minimizes the portfolio risk
by means of combining
two or more assets
in a portfolio
Belle Corporation gives out the following information below.
Compute the (1) Portfolio return of Stocks A and B and B and C
(2) Portfolio risk of Stocks A and B and B and C.
Year Stock A Stock B Stock C

Stock Price Returns Stock Price Returns Stock Price Returns

2005 50 50 20

2006 45 -10.00% 45 -10.00% 22 10.00%

2007 40 -11.11% 40 -11.11% 24 11.11%

2008 35 -12.50% 35 -12.50% 27 12.50%

2009 30 -14.29% 30 -14.29% 31 14.29%

2010 25 -16.67% 25 -16.67% 37 16.67%

2011 20 -20.00% 20 -20.00% 44 20.00%

Average Return -14.09% -14.09% 14.09%

Standard Deviation 3.37% 3.37% 3.37%

?????
 There
is some assurace
out there and it's called :
Required Rate of Return
 2%
3%
How do we determine the appropriate
required rate of return?
(Google images, 2016)
 Security market line (SNL)

 risk-free rate
 expected rate of return
 beta
β = 1 (same risk as the market)
β < 1 (less risky than the market)
β > 1 (riskier than the market)
 Mr. Trident, a prominent businessman,
plans to invest in Stock A. The risk-free
rate is 10%; the expected rate of return on
the market is 13%; and Stock A has a beta
of 0.75.

What is the required rate of return of Stock

A?
Trinna
Gemrose
Rashid
Aila
Clarice
Samara
Elisha
Nick
Lorraine
Daniel
Kate
Marianne
Mary Ann
Aima
Trixie
Cheska
Ruthie
Chara
Jurelle
end