Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Chapter 12. Financial Return and Risk Concepts

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

Chapter Learning Objectives:

• Know how to compute arithmetic averages, variances, and standard deviations using return data for a single financial asset.

• Understand the sources of risk.

• Know how to compute expected return and expected variance using scenario analysis.

• Know the historical rates of return and risk for different securities.

• Understand the concept of market efficiency and explain the three types of efficient markets.

• Explain how to calculate the expected return on a portfolio of securities.

• Understand how and why the combining of securities into portfolios reduces the overall or portfolio risk.

• Explain the difference between systematic and unsystematic risk.

• Understand the importance of ethics in investment-related positions.

Where We Have Been...

We know investors take their savings and direct it in various ways: some to bank accounts, some to stocks, bonds, or other investment vehicles. Investors direct their savings to various instruments by considering a number of factors—How safe is my money? Am I willing to risk a loss in hopes of achieving a large gain? What happens to my investment if security market prices rise or fall?

Where We Are Going...

The concepts of risk and return presented in this chapter are important not only to investors; they are important to the businesses that issue the bonds and stocks that investors purchase. Businesses use a variety of short-term and long-term ...