Learning Material Sample
Investment and risk3.4 Risk and returns - measuring volatilityIn this section we examine some of the key measures used in investment planning to assess risk and volatility. The standard deviation of returns measures how widely the actual return of an investment year on year varies around the mean or expected return.
Where an investment has year on year returns that are... Shortened demo course. See details at foot of page. ...r standard deviation, they are considered more risky.We will now go onto to see another measurement of risk that applies to the relationship between an investment and the market as a whole (beta). Introduction to Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) was a development of Modern Portfolio Theory introduced in the 1960s. It provides a model to estimate whether the expected returns from a portfolio of investments are sufficient given the amount of risk being taken. It is a linear model linking risk and returns. Effectively CAPM states that the total risk of a security is a combination of systematic and non-systematic risk. Non-systematic risk (as already seen) can be eliminated through diversification of the portfolio. The investor therefore faces only systematic risk, the extent to which a security is correlated to the market as a whole. CAPM identifies a measure of this risk known as “ beta ”. It establishes a linear relations... Shortened demo course. See details at foot of page. ...isk reduction, could ultimately lead to returns being proportionately reduced relative to the market too.Using CAPM: In recent years CAPM has come under some considerable criticism not least because of the fact that more complex statistical and computer based models can be used to analyse security performance and risk than was available when CAPM was first introduced In addition studies of past security prices indicate over time that some non-systematic risk is being valued in the market rather than just systematic risk Betas are calculated from historical results. They can therefore be an unreliable future predictor of returns Over certain review periods, studies have indicated that there is not the strong relationship between beta and return as first thought. Alpha is the actual re...
Shortened demo course. See details at foot of page. ...ha shows the opposite. The Sharpe ratio is a measurement of the risk-adjusted return...
Shortened demo course. See details at foot of page. ... “risk adjusted” investment performance has been. |
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