Risk Premium and Risk Return in Capital Markets

 
 
 
 
1. In the capital market line, investors calculate the risk premium associated with a portfolio of specific stocks. The expected return of the portfolio is equal to the risk free interest rate plus a risk premium multiplied by the portfolio's standard deviation. The risk premium is equal to the expected market returns minus the risk-free return divided by the standard deviation of the market. Key to this approach is the emphasis on the market's performance and the risk associated with the market, as well as the portfolio's performance and the risk associated with the portfolio. Individual securities are not taken into account specifically, but the portfolio and market as a whole--and their associated risks--are evaluated, instead.

The security market line, as its name suggests, is concerned with individual securities. In the case of an individual security, risk is associated with how the security varies in relationship to the market as a whole. Here, covariance is used instead of the standard deviation since the risk of an individual security is measured by its contribution to the risk of its associated portfolio. The security market line also uses the covariance of the market, rather than the standard deviation used with the capital market line. Risk is thus measured by the covariance of each security against the market, and the scale is considerably smaller than the scale of the capital market line. A security that has zero correlation to the market is riskless wh

     
 
 
 
    

 

Related Essays

Capital Markets .... are available to measure the risk and return relationship of .... asset pricing model holds that, in efficient capital markets the expected risk premium on each .... (1409 6 )

The Capital Asset Pricing Model: A Critique .... specific security how much additional return must an .... to determine the level of the market risk premium. .... that "in well functioning capital markets the expected .... (1462 6 )

Marginal Cost and Cost of Capital and How it is Calculated .... rates and the company's perceived market risk impact its cost of capital? .... that stocks "normally" produce an 8% real return and a 5% risk premium over bonds .... (820 3 )

Behavior of Asset Prices .... CAPM is also applied to other types of capital budgeting decisions .... model employs the variance in expected return of an .... the level of the market risk premium of a .... (2655 11 )

VALUATION OF NEW PRIVATE COMPANIES .... a specific securityA¹how much additional return must an .... determine the level of the market risk premium. .... that "in well-functioning capital markets the expected .... (3573 14 )


Category: Economics - R
 
 
 
Common Topics
 
 
 
 
 
 
 
Click Here to Get Instant Access to over 32,000 Professionally Written Papers!!!
 
 
 
Join Now  
 
 
 
 
 
Saved Papers  
 
 
Save your essays here so you can locate them quickly!
 
 
 
Testimonials  
 
"Great site, I got a lot of new ideas I would have never thought of before."
Nate A.
 
"I love this site!!!"
Marie H.
 
"Thank you for making such a high quality site! Your papers are the best I have seen around"
Debbie B.
 
"Your site was very helpful and gave me the details I needed in order to complete my essay!!!"
Mike F.
 
"This site is an excellent vehicle for quick referrences. Thanks a bunch!"
Carla T.
 
 
 
 
Copyright © 2007 - 2014 Lots of Essays. All Rights Reserved. DMCA