山东理工大学：《财务管理专业英语》课程教学课件（PPT讲稿）Topic 6 Risk and return

马 致用·专业英语系列教制 财务管理 Professional 专业英语 English for 第3版 Professiondl English for Financial Financial Managemene 东北财经大学刘媛媛 Management 3/e ⊙积撼五出出御热 刘媛媛编 机械工业出版社 Topic 6:Risk Return

Professional English for Financial Management 3/e 刘媛媛 编 机械工业出版社 Topic 6: Risk & Return

Outline Learning Objectives:Topic 6 6.I Introduction to Risk and Return 6.2 Efficient Market Hypothesis(EMH) 6.3 Portfolio Theory 6.4 Beta and Capital Asset Pricing Model 6.5 Arbitrage Pricing Theory 6-2 SDUT Chen Gang Spring 2018

Outline & Learning Objectives: Topic 6  6.1 Introduction to Risk and Return  6.2 Efficient Market Hypothesis (EMH)  6.3 Portfolio Theory  6.4 Beta and Capital Asset Pricing Model  6.5 Arbitrage Pricing Theory 6-2 SDUT Chen Gang Spring 2018

Core words expressions:Topic 6 Ref.pp.102~103 Post-earnings-announcement drift In financial economics and accounting research,post- earnings-announcement drift,or PEAD (also named the standardized unexpected earnings,SUE effect)is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (even several months)following an earnings announcement. If the profit results are better than expected,for instance, the stock will continue to advance over time in response. Conversely,in the event of an earnings disappointment,the stock will lose ground for the duration of the drift. 意陵萄省桶基着晝攀凳鑫金文嫠状氏受宋是过 度)，这显然有悖于EMH。 >6-3 SDUT Chen Gang Spring 2018

Core words & expressions: Topic 6  Ref. pp.102~103  Post-earnings-announcement drift  In financial economics and accounting research, post￾earnings-announcement drift, or PEAD (also named the standardized unexpected earnings, SUE effect) is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (even several months) following an earnings announcement.  If the profit results are better than expected, for instance, the stock will continue to advance over time in response. Conversely, in the event of an earnings disappointment, the stock will lose ground for the duration of the drift.  意味着价格并没有迅速对盈余公告做出反应，而是经过 一段时间调整后才将盈余信息融入股价（反应不足/过 度），这显然有悖于EMH。 6-3 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (1/6) All financial assets are expected to produce cash flows,and the risk of an asset is judged by the risk of its cash flows. 2 assumptions about risk and return: The returns from investments are normally distributed. Investors are risk-averse. The risk of an asset can be considered in two ways: on a stand-alone basis The asset's cash flows are analyzed by themselves in a portfolio context The asset's cash flows are combined with those of other assets,and then the consolidated cash flows are analyzed. >6-4 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (1/6)  All financial assets are expected to produce cash flows, and the risk of an asset is judged by the risk of its cash flows.  2 assumptions about risk and return:  The returns from investments are normally distributed.  Investors are risk-averse.  The risk of an asset can be considered in two ways:  on a stand-alone basis  The asset’s cash flows are analyzed by themselves  in a portfolio context  The asset’s cash flows are combined with those of other assets, and then the consolidated cash flows are analyzed. 6-4 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (2/6) In a portfolio context,an asset's risk can be divided into two components: diversifiable risk can be diversified away and thus is of little concern to diversified investors market risk Reflects the risk of a general stock market decline and cannot be eliminated by diversification,and does concern investors Only market risk is relevant,diversifiable risk is irrelevant to rational investors because it can be eliminated An asset with a high_degree of relevant(market)risk must provide a relatively high expected rate of return to attract investors. Investors in general are averse to risk,so they will not buy risky assets unless those assets have high expected returns >6-5 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (2/6)  In a portfolio context, an asset’s risk can be divided into two components:  diversifiable risk  can be diversified away and thus is of little concern to diversified investors  market risk  Reflects the risk of a general stock market decline and cannot be eliminated by diversification, and does concern investors  Only market risk is relevant, diversifiable risk is irrelevant to rational investors because it can be eliminated  An asset with a high degree of relevant (market) risk must provide a relatively high expected rate of return to attract investors.  Investors in general are averse to risk, so they will not buy risky assets unless those assets have high expected returns 6-5 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (3/6) What is Return? A return expresses the financial performance of a financial asset (or investment),which might be above or below its value at the time of investment/purchase. Expected return refers to the expected change in the value of an asset over a given(future)time period. What is Risk? It refers to situations in which the outcomes are not known with certainty.The greater the variability of the possible returns,the riskier the investment is. Under the normality assumption,risk is usually estimated with the standard deviation (SD),which is the square root of the variance of returns. >6-6 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (3/6)  What is Return?  A return expresses the financial performance of a financial asset (or investment), which might be above or below its value at the time of investment/purchase.  Expected return refers to the expected change in the value of an asset over a given (future) time period.  What is Risk?  It refers to situations in which the outcomes are not known with certainty. The greater the variability of the possible returns, the riskier the investmentis.  Under the normality assumption, risk is usually estimated with the standard deviation (SD), which is the square root of the variance of returns. 6-6 SDUT Chen Gang Spring 2018

Introduction to Risk and Return (4/6) Stand-alone Risk(specific risk) The risk an investor would face if he/she holds only this one asset Investment risk is related to the probability of actually earning a low or negative return Uncertainty In financial returns,it exists when there may be more than one possible outcome Investors use various risk assessment methods: sensitivity analysis scenario analysis Probability The likelihood that an event will take place Probability,Probability Distribution,Probability distribution function >6-7 SDUT Chen Gang Spring 2018

 Stand-alone Risk (specific risk)  The risk an investor would face if he/she holds only this one asset  Investment risk is related to the probability of actually earning a low or negative return  Uncertainty  In financial returns, it exists when there may be more than one possible outcome  Investors use various risk assessment methods:  sensitivity analysis  scenario analysis  Probability  The likelihood that an event will take place  Probability, Probability Distribution, Probability distribution function 6-7 SDUT Chen Gang Spring 2018 Introduction to Risk and Return (4/6)

Introduction to Risk and Return (5/6) Normal distribution We almost always assume that financial returns can be described by a continuous normal distribution function.It's called the normality assumption. The 2 parameters: The expected return(mean) The standard deviation (or,variance) >This implies that investors live in a mean-variance world, signifying that investors choose financial assets exclusively on the basis of risk and return. >r~Nu,σ2) >6-8 SDUT Chen Gang Spring 2018

 Normal distribution  We almost always assume that financial returns can be described by a continuous normal distribution function. It’s called the normality assumption.  The 2 parameters:  The expected return (mean)  The standard deviation (or, variance) →This implies that investors live in a mean-variance world, signifying that investors choose financial assets exclusively on the basis of risk and return.  r ~ N(µ, σ 2 ) 6-8 SDUT Chen Gang Spring 2018 Introduction to Risk and Return (5/6)

Introduction to Risk and Return (6/6) Risk aversion Financial theory typically views decision makers as being risk-averse. A risk-averse decision maker considers a risky investment only if it provides compensation for risk through a risk premium >6-9 SDUT Chen Gang Spring 2018

 Risk aversion  Financial theory typically views decision makers as being risk-averse.  A risk-averse decision maker considers a risky investment only if it provides compensation for risk through a risk premium 6-9 SDUT Chen Gang Spring 2018 Introduction to Risk and Return (6/6)

Efficient Market Hypothesis (EMH)(1/2) Assumptions 1.The returns from investments are normally distributed. 2.Investors are risk-averse. 3.Investors are rational. 4.Investors are price takers. 5.The Efficient Market Hypothesis(EMH)holds. >6-10 SDUT Chen Gang Spring 2018

Efficient Market Hypothesis (EMH) (1/2)  Assumptions  1. The returns from investments are normally distributed.  2. Investors are risk-averse.  3. Investors are rational.  4. Investors are price takers.  5. The Efficient Market Hypothesis (EMH) holds. 6-10 SDUT Chen Gang Spring 2018