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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,*,Lec 1The Investment Setting,为了弥补50%的退步，我们往往需要付出100%的努力,-股票市场启示录,1,The Investment Setting,a) explain the concept of required rate of return and discuss the components of it.,b) differentiate between the real and the nominal risk-free rate of return,c) explain the risk premium and the associated fundamental sources of risk;,d) define the security market line and discuss the factors that cause movements along,changes in the slope of, and shifts of the security market line.,2,Why Do Individuals Invest ?,By saving money (instead of spending it), individuals tradeoff present consumption for a larger future consumption.,3,LOS,a: concept of required rate of return and components of an investors required rate of return,.,The,real risk free rate of interest:,The real risk free rate of interest is determined by the supply and demand for funds in the economy.,The,inflation premium,is an adjustment to the real risk free rate to compensate investors for expected changes in the price indexes and money market conditions being tightened or eased due to inflationary expectations.,The,risk premium,is what investors demand for the uncertainty associated with an investment.,4,How Do We Measure The Rate Of Return On An Investment ?,The,pure rate of interest,is the exchange rate between future consumption and present consumption. Market forces determine this rate.,5,Peoples willingness to pay the difference for borrowing today and their desire to receive a surplus on their savings give rise to an interest rate referred to as the,pure time value of money,.,How Do We Measure The Rate Of Return On An Investment ?,6,If the future payment will be diminished in value because of,inflation, then the investor will demand an interest rate higher than the pure time value of money to,also cover the expected inflation,expense.,How Do We Measure The Rate Of Return On An Investment ?,7,If the future payment from the,investment is not certain, the investor will demand an interest rate that exceeds the pure time value of money plus the inflation rate to,provide a risk premium,to cover the investment risk.,How Do We Measure The Rate Of Return On An Investment ?,8,Measures of Historical Rates of Return,Holding Period Return,Holding Period Yield,HPY = HPR - 1,1.10 - 1 = 0.10 = 10%,9,Annual Holding Period Return,Annual HPR = HPR,1/n,where n = number of years investment is held,Annual Holding Period Yield,Annual HPY = Annual HPR - 1,Measures of Historical Rates of Return,10,Measures of Historical Rates of Return,Arithmetic Mean,1.4,11,Measures of Historical Rates of Return,Geometric Mean,1.5,12,A Portfolio of Investments,The mean historical rate of return for a portfolio of investments is measured as the weighted average of the HPYs for the individual investments in the portfolio.,13,Computation of HoldingPeriod Yield for a Portfolio,tab 1.1,14,Expected Rates of Return,Risk is uncertainty that an investment will earn its expected rate of return,Probability is the likelihood of an outcome,15,Expected Rates of Return,1.6,16,Risk Aversion,The assumption that most investors will choose the least risky alternative, all else being equal and that they will not accept additional risk unless they are compensated in the form of higher return,17,Probability Distributions,Risk-free Investment,Exhibit 1.1,18,Probability Distributions,Risky Investment with 3 Possible Returns,Exhibit 1.2,19,Probability Distributions,Risky investment with ten possible rates of return,Exhibit 1.3,20,Measuring the Risk of Expected Rates of Return,1.7,21,Measuring the Risk of Expected Rates of Return,Standard Deviation is the square root of the variance,1.8,22,Measuring the Risk of Expected Rates of Return,Coefficient of variation (CV) a measure of relative variability that indicates risk per unit of return,Standard Deviation of Returns,Expected Rate of Returns,1.9,23,Measuring the Risk of Historical Rates of Return,variance of the series,holding period yield during period I,expected value of the HPY that is equal to the arithmetic mean of the series,the number of observations,1.10,24,LOS,b: real, nominal risk-free rate of return and computation of both return measures,real risk-free rate of interest,is the price charged for the exchange between current goods and future goods by investors in the economy.,The inflation premium is an adjustment to the real risk-free rate to compensate investors for expected changes in the price indexes and money market conditions being tightened or eased due to inflationary expectations.,25,LOS,b: real, nominal risk-free rate of return and computation of both return measures,The adjustment is:,nominal risk free rate = (1 + real risk free rate)(1 + inflation rate),For the exam, you will want to know:,The nominal risk free rate is approximated by: Real risk free rate + Inflation rate.,The real risk free rate = (1 + nominal risk free rate) / (1 + inflation rate) -1,26,LOS,c:,Explain,the risk premium and the associated fundamental sources of risk.,risk premium is what investors demand for the uncertainty associated with an investment. The risk premium addresses the following types of risk exposure,Business risk,Financial risk,Liquidity risk,Exchange rate risk,Country risk,27,Business Risk,Uncertainty of income flows caused by the nature of a firms business,Sales volatility and operating leverage determine the level of business risk.,28,Financial Risk,Uncertainty caused by the use of debt financing.,Borrowing requires fixed payments which must be paid ahead of payments to stockholders.,The use of debt increases uncertainty of stockholder income and causes an increase in the stocks risk premium.,29,Liquidity Risk,Uncertainty is introduced by the secondary market for an investment.,How long will it take to convert an investment into cash?,How certain is the price that will be received?,30,Exchange Rate Risk,Uncertainty of return is introduced by acquiring securities denominated in a currency different from that of the investor.,Changes in exchange rates affect the investors return when converting an investment back into the “home” currency.,31,Country Risk,Political risk is the uncertainty of returns caused by the possibility of a major change in the political or economic environment in a country.,Individuals who invest in countries that have unstable political-economic systems must include a country risk-premium when determining their required rate of return,32,Risk Premium,Risk premium by fundamental risk f,(Business Risk, Financial Risk, Liquidity Risk, Exchange Rate Risk, Country Risk),Portfolio Theory I: risk premium is determined by f,(Systematic Market Risk),They are highly correlated,33,Risk Premium and Portfolio Theory,The relevant risk measure for an individual asset is its co-movement with the market portfolio,Systematic risk relates the variance of the investment to the variance of the market,Beta measures this systematic risk of an asset,34,Fundamental Risk versus Systematic Risk,Fundamental risk comprises business risk, financial risk, liquidity risk, exchange rate risk, and country risk,Systematic risk refers to the portion of an individual assets total variance attributable to the variability of the total market portfolio,35,LOS,d:SML,slope,shift,Define,the security market line and,discuss,the factors that cause movements along, changes in the slope of, and shifts of the security market line.,36,security market line,(SML). The equation of the SML is ER = R,f,+ (R,M,- R,f,)Beta,Exhibit 1.7,(,Expected),37,Changes in the Required Rate of Return Due to Movements Along the SML,Exhibit 1.8,38,Changes in the Slope of the SML,The market risk premium for the market portfolio (contains all the risky assets in the market) can be computed:,RP,m,= E(R,m,)- NRFR where:,RP,m,= risk premium on the market portfolio,E(R,m,) =,expected return on the market portfolio,NRFR = expected return on a risk-free asset,39,Change in Market Risk Premium,Exhibit 1.10,NRFR,Expected Return,R,m,R,m,Counterclockwise of SML,when expected return on the market portfolio increases,40,Capital Market Conditions, Expected Inflation, and the SML,Exhibit 1.11,NRFR,NRFR,Expected Return,41,Parallel shift of SML,SML shift when,High Economic growth,Increasing inflation,Tightness in money or capital market,42,
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