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CHAPTER 8 Risk and Rates of Return

Investment returns. The rate of return on an investment can be calculated as follows:(Amount received

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CHAPTER 8 Risk and Rates of Return

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    1. CHAPTER 8 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM / SML

    2. Investment returns The rate of return on an investment can be calculated as follows: (Amount received – Amount invested) Return = ________________________ Amount invested For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%.

    3. What is investment risk? Two types of investment risk Stand-alone risk Portfolio risk Note: the book is not correct wrt definition of risk. Investment risk is related to the degree of variability of possible outcomes; Gain, loss, or break even The greater the variability of possible outcomes, the riskier the investment.

    4. Probability distributions A listing of all possible outcomes, and the probability of each occurrence. Can be shown graphically.

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