7

Risk and Return

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© David Young-Wolff/PhotoEdit

Learning Objectives

image Explain the relation between risk and return.

image Describe the two components of a total holding period return, and calculate this return for an asset.

image Explain what an expected return is and calculate the expected return for an asset.

image Explain what the standard deviation of returns is and why it is very useful in finance, and calculate it for an asset.

image Explain the concept of diversification.

image Discuss which type of risk matters to investors and why.

image Describe what the Capital Asset Pricing Model (CAPM) tells us and how to use it to evaluate whether the expected return of an asset is sufficient to compensate an investor for the ...

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