RSM332H1 Study Guide - Final Guide: Net Present Value, Dividend Yield, Liquidity Premium
Document Summary
Risk aversion leads to risk premium, risk premium is the additional return, above the risk-free rate, resulting from bearing risk. In equilibrium, assets with higher risks will have lower prices and hence higher average returns. Realized returns = hpr: = dividend yield + capital gains yield. var(x)=e[(x-e(x))2]==e(x2)-[e(x)]2; var(ax+by)=a2var(x)+b2var(y)+2ab*cov(x,y)=a2var(x)+b2var(y)+2ab*(x,y)*(x)*(y); var(ax+by+cz+dw)=a2var(x)+b2var(y)+c2var(z)+d2var(w)+2ab*cov(x,y)+2ac*cov(x,z)+2ad*cov(x,w)+2bc*cov(y,z)+2bd*cov(y,w)+2cd*cov(z,w) cov(x,y)=e[(x-e(x))(y-e(y))]==e(xy)-e(x)e(y); , =1 iff x=a+by with b>0; =-1 iff x=a+by with b<0; cov(a,x)=0; cov(ax+by,cz+dw)=ac*cov(x,z)+ad*cov(x,w) [sample] ; ; ; long position (buy): wi>0; short position (sell): wi<0. As long as assets are not perfectly correlated, then diversification can reduce risk up to a certain point. Diversification eliminates idiosyncratic risk (firm- specific/non-systematic/diversifiable/unique risk: strike, quality of board of directors), risk remains is called market risk (systematic/non-diversifiable risk: i, quality of regulations, poil ). Efficient frontier or set is the set of achievable portfolio combinations that offer the highest rate of return for a given level of risk. Mvp (minimum variance portfolio): ; if =-1 then =0.
