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Financial Management Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 5: Risk and Return Analysis

CONTENTS
Objectives
Introduction
5.1 Risk and Return Characterization

5.1.1 Return Defined
5.1.2 Risk Preferences
5.2 Risk Measurement
5.2.1 Risk Assessment
5.2.2 Probability Distribution

5.2.3 Risk Measurement Quantitatively
5.3 Portfolio Theory and Risk Diversification
5.3.1 Portfolio Return and Standard Deviation
5.3.2 Measuring Portfolio Risk

5.3.3 Variance of a Portfolio
5.3.4 Minimum Variance Portfolio
5.4 Portfolio Risk and Correlation
5.4.1 Portfolio Risk N-Security Case
5.4.2 Systematic and Unsystematic Risk

5.5 Capital Asset Pricing Model (CAPM)
5.5.1 Assumptions of CAPM
5.5.2 Interpreting Beta
5.5.3 Limitations of CAPM

5.6 Summary
5.7 Keywords
5.8 Review Questions
5.9 Further Readings

Objectives

After studying this unit, you will be able to:

 Recognize the concept of risk and return and determine their relationship
 Differentiate relevant and irrelevant risk
 Explain the measurement of risk
 Describe the use of Capital Asset Pricing Model (CAPM)

66 LOVELY PROFESSIONAL UNIVERSITY