Lecture Business finance (9/e) - Chapter 7: Portfolio theory and asset pricing

Chapter 7 Portfolio Theory and Asset Pricing Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 7–1 Prepared by Dr Buly Cardak Learning Objectives • Understand how ‘risk’ and ‘return’ are defined and measured. • Understand the concept of risk-aversion by investors. • Explain how diversification reduces risk. • Understand the importance of covariance between returns on assets in determining the risk of a portfolio. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 7–2 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Explain the concept of efficient portfolios. • Explain the distinction between systematic and unsystematic risk. • Explain why systematic risk is important to investors. • Explain the relationship between returns and risk proposed by the capital asset pricing model. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 7–3 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Understand the relationship between the capital asset pricing model and the arbitrage pricing model. • Explain the development of the Fama–French three-factor model. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 7–4 Prepared by Dr Buly Cardak Return • There is uncertainty associated with returns from shares. • Assume we can assign probabilities to the possible returns — given an assumed set of circumstances, the expected return is given by: n where: E R RiP i = return in event or case i i 1 i = probability of event or case i Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 7–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn