ECON 2560 Chapter Notes - Chapter 12: Risk-Free Interest Rate, Risk Premium, Market Risk
30 Jul 2013
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Changes in interest rates, government spending, monetary policy , oil prices foreign exchange rates & other macroeconomic events affect almost all companies and the returns on almost all stocks. Market portfolio: a portfolio of all assets in the economy. In practice, a broad stock market index (such as the s&p/tsx) is used to represent the market. Can assess the impact of macro news by tracking the rate of return on a market portfolio. Risk depends on exposure to macro events and can be measured by the sensitivity of a stock"s returns to fluctuations in returns on the market portfolio. Investors choose from a large number of different securities (common shares, preferred shares, income trust units, etc. ) Some stocks are less effected by market fluctuations. The average beta of a;; stocks is 1. 0. Defensive = not very sensitive to market fluctuations (betas less than 1. 0) Sensitive stocks = amplify market movements (betas greater than 1. 0)
