11. OVERVIEW
We have expectation of extra reward for taking up more risk.
An asset risk premium is the additional compensation required above the risk-
free rate for holding that asset.
At the market level, the market-risk premium is the additional return above the
risk-free rate to hold the market portfolio for a given asset.
14. Where,
rp = expected return of portfolio
rf = risk free rate of return
rm = market rate of return
σp = standard deviation of portfolio
σm = standard deviation of market
15.
16. Where,
ρim = correlation coefficient of security and the market
σi = standard deviation of security
σm = standard deviation of the market
COVim = covariance of security and the market
25. CONCLUSION
What is CAPM in Simple words?
What is beta (β) in simple words ?
10% more volatility
Graph Line of XYZ Company
Market Volatility
26. NEVER DEPEND ON SINGLE
INCOME. MAKE INVESTMENT
TO CREATE A SECOND
SOURCE.
WARREN BUFFET
Hinweis der Redaktion
Talk about efficient frontier
related with risky securities only
Relate with market ma there are both risky and risk free assets
Risk free and risky securities
The CML is tangent to the efficient frontier curve which gives the optimum portfolio point
The formula that gives these points to plot is in next slide
CML includes standard deviation. i.e. both systematic and unsystematic risk
Defined both risks
Unsystematic risk can be diversified so market only rewards the systematic risks
Beta compares the security’s volatility with the industry
Beta <>= 1 +1 -!
Explain this example
Security market line
When we are well known about the diversification this quote of an American Investor , Warren Buffet makes a very good sense which teach us to diversify the product.
Considers systematic risk, assumption garne ho bhane ta it will take decades to realize which one is better option but systematic risk le garera its helpful to assume certain point while unsystematic risk bhaneko bhai pari aune kura ho
This concept help us to understand the possible risk according to market and it helps us assume the requires rate of return .
CAPM can be denoted as a basic concept that if we have the higher risk
then we must set certain required rate of return to put an option to choose
That risky option compared to less risky and risk free option.
Beta is nothing but a rate of additional volatility of investment option in this case, the beta can be called 1.1 this means 10% riskier when the slope is downward and 10% profitable when the slope is upward.
