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Standard deviation.
Variance and coefficient of variance.
Capital Asset pricing Model (CAPM).
Security Market Line (SML).
Standard deviation
Variance 2
n
(k
i 1
i kˆ) 2 Pi
Stock C
2 = .3(15-9.9)2 + .5(10-9.9)2 + .2(2-9.9)2 = 20.29
= 4.50%
Stock T
2 = .3(25-17.7)2 + .5(20-17.7)2 + .2(1-17.7)2 =
74.41
= 8.63%
Std dev
CV ^
Mean k
Stand-Alone Risk, p
20
0
10 20 30 40 2,000+
Stocks in Portfolio
25 25 25
15 15 15
0 0 0
25 25 25
15 15 15
0 0 0
^
k k
^
HT 17.4% 17.1% Undervalued (k k)
^
Market 15.0 15.0 Fairly valued (k k)
^
USR 13.8 14.2 Overvalued (k k)
^
T - bills 8.0 8.0 Fairly valued (k k)
^
Coll. 1.7 1.9 Overvalued (k k)
kM = 15
HT
.. .
kRF = 8
. T-bills
USR
-1
.
Coll. 0 1 2
Risk, βi
^
k p is a weighted average :
^ n ^
kp wi ki
i 1
^
k p 0.5 (17.4%) 0.5 (1.7%) 9.6%
Q&A
• Valuation of Shares