Download or read book Understanding the Risk Return Relation written by Scott Cederburg and published by . This book was released on 2017 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: The ICAPM implies that the market's conditional expected return is proportional to its conditional variance and that the reward-to-risk ratio equals the representative investor's coefficient of relative risk aversion. Prior studies examine this relation using the stock market to proxy for aggregate wealth and find mixed results. We show, however, that stock-based tests suffer from low power and lead to biased estimates of the risk-return tradeoff when stocks are an imperfect market proxy. Tests designed to mitigate this bias by incorporating a more comprehensive measure of aggregate wealth produce large, positive estimates of the risk-aversion coefficient around seven to nine.
Download or read book Risk Return Relationship and Portfolio Management written by Raj S. Dhankar and published by Springer Nature. This book was released on 2019-10-24 with total page 323 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book covers all aspects of modern finance relating to portfolio theory and risk–return relationship, offering a comprehensive guide to the importance, measurement and application of the risk–return hypothesis in portfolio management. It is divided into five parts: Part I discusses the valuation of capital assets and presents various techniques and models used in this context. Part II then addresses market efficiency and capital market models, particularly focusing on measuring market efficiency, which is a crucial factor in making correct investment decisions. It also analyzes the major capital market models like CAPM and APT to determine to what extent they are suitable for use in developing economies. Part III highlights the significance of risk–return analysis as a prerequisite for investment decisions, while Part IV examines the selection and performance appraisals of portfolios against the backdrop of the risk–return relationship. It also examines new tools such as the value-at-risk application for mutual funds and the applications of the price-to-earnings ratio in portfolio performance measurement. Lastly, Part V explores contemporary issues in finance, including the relevance of Islamic finance in the increasingly volatile global financial system.
Download or read book Risk return Relationship and Portfolio Management written by Raj S. Dhankar and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This book covers all aspects of modern finance relating to portfolio theory and risk-return relationship, offering a comprehensive guide to the importance, measurement and application of the risk-return hypothesis in portfolio management. It is divided into five parts: Part I discusses the valuation of capital assets and presents various techniques and models used in this context. Part II then addresses market efficiency and capital market models, particularly focusing on measuring market efficiency, which is a crucial factor in making correct investment decisions. It also analyzes the major capital market models like CAPM and APT to determine to what extent they are suitable for use in developing economies. Part III highlights the significance of risk-return analysis as a prerequisite for investment decisions, while Part IV examines the selection and performance appraisals of portfolios against the backdrop of the risk-return relationship. It also examines new tools such as the value-at-risk application for mutual funds and the applications of the price-to-earnings ratio in portfolio performance measurement. Lastly, Part V explores contemporary issues in finance, including the relevance of Islamic finance in the increasingly volatile global financial system.
Download or read book What is the Shape of the Risk Return Relation written by Alberto G. P. Rossi and published by . This book was released on 2010 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a flexible econometric approach that avoids imposing restrictive modeling assumptions, we find evidence of a non-monotonic relation between conditional volatility and expected stock market returns: At low-to-medium levels of conditional volatility there is a positive trade-off between risk and expected returns, but this relationship gets inverted at high levels of volatility as observed during the recent financial crisis. We propose a new measure of risk based on the conditional covariance between daily observations of a broad economic activity index and stock returns. Using this covariance measure, we find clear evidence of a monotonically increasing risk-return trade-off. Our finding of a non-monotonic mean-volatility relation helps explain the absence of a consensus in the empirical literature on the sign of the risk-return trade-off. At the same time, our finding that the expected return is a monotonically rising function of the conditional covariance measure also suggests that a positive risk-return relation can be established once a better measure of risk is used.
Download or read book The Empirical Risk return Relation written by Sydney C. Ludvigson and published by . This book was released on 2005 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: "A key criticism of the existing empirical literature on the risk-return relation relates to the relatively small amount of conditioning information used to model the conditional mean and conditional volatility of excess stock market returns. To the extent that financial market participants have information not reflected in the chosen conditioning variables, measures of conditional mean and conditional volatility--and ultimately the risk-return relation itself--will be misspecified and possibly highly misleading. We consider one remedy to these problems using the methodology of dynamic factor analysis for large datasets, whereby a large amount of economic information can be summarized by a few estimated factors. We find that three new factors, a "volatility, " "risk premium, " and "real" factor, contain important information about one-quarter ahead excess returns and volatility that is not contained in commonly used predictor variables. Moreover, the factor-augmented specifications we examine predict an unusual 16-20 percent of the one-quarter ahead variation in excess stock market returns, and exhibit remarkably stable and strongly statistically significant out-of-sample forecasting power. Finally, in contrast to several pre-existing studies that rely on a small number of conditioning variables, we find a positive conditional correlation between risk and return that is strongly statistically significant, whereas the unconditional correlation is weakly negative and statistically insignificant"--National Bureau of Economic Research web site.
Download or read book Plight of the Fortune Tellers written by Riccardo Rebonato and published by Princeton University Press. This book was released on 2007-09-17 with total page 303 pages. Available in PDF, EPUB and Kindle. Book excerpt: Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading--and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers--and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices--but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher--can you risk it?
Download or read book Risk Uncertainty and Profit written by Frank H. Knight and published by Cosimo, Inc.. This book was released on 2006-11-01 with total page 401 pages. Available in PDF, EPUB and Kindle. Book excerpt: A timeless classic of economic theory that remains fascinating and pertinent today, this is Frank Knight's famous explanation of why perfect competition cannot eliminate profits, the important differences between "risk" and "uncertainty," and the vital role of the entrepreneur in profitmaking. Based on Knight's PhD dissertation, this 1921 work, balancing theory with fact to come to stunning insights, is a distinct pleasure to read. FRANK H. KNIGHT (1885-1972) is considered by some the greatest American scholar of economics of the 20th century. An economics professor at the University of Chicago from 1927 until 1955, he was one of the founders of the Chicago school of economics, which influenced Milton Friedman and George Stigler.
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Download or read book Uncovering the Risk return Relation in the Stock Market written by Hui Guo and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is an ongoing debate in the literature about the apparent weak or negative relation between risk (conditional variance) and return (expected returns) in the aggregate stock market. We develop and estimate an empirical model based on the ICAPM to investigate this relation. Our primary innovation is to model and identify empirically the two components of expected returns--the risk component and the component due to the desire to hedge changes in investment opportunities. We also explicitly model the effect of shocks to expected returns on ex post returns and use implied volatility from traded options to increase estimation efficiency. As a result, the coefficient of relative risk aversion is estimated more precisely, and we find it to be positive and reasonable in magnitude. Although volatility risk is priced, as theory dictates, it contributes only a small amount to the time-variation in expected returns. Expected returns are driven primarily by the desire to hedge changes in investment opportunities. It is the omission of this hedge component that is responsible for the contradictory and counter-intuitive results in the existing literature
Download or read book An Introduction to Risk and Return from Common Stocks written by Richard A. Brealey and published by MIT Press (MA). This book was released on 1969 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Analyzing the Time Varying Stock Market Risk Return Relation written by C. N. V. Krishnan and published by . This book was released on 2011 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the stock market risk-return relation over the period from 1927 to 2005. We empirically implement the Intertemporal Capital Asset Pricing Model (ICAPM) using a cross-section of stock and bond portfolios, and allow for the market price of risk to be time-varying. We show that including bond portfolios in the estimation not only significantly changes the time-series estimates of the market price of risk, but also makes the correlation between conditional stock-market variance and the variance component of expected market return positive.
Download or read book Handbook of Computational Econometrics written by David A. Belsley and published by John Wiley & Sons. This book was released on 2009-08-18 with total page 514 pages. Available in PDF, EPUB and Kindle. Book excerpt: Handbook of Computational Econometrics examines the state of the art of computational econometrics and provides exemplary studies dealing with computational issues arising from a wide spectrum of econometric fields including such topics as bootstrapping, the evaluation of econometric software, and algorithms for control, optimization, and estimation. Each topic is fully introduced before proceeding to a more in-depth examination of the relevant methodologies and valuable illustrations. This book: Provides self-contained treatments of issues in computational econometrics with illustrations and invaluable bibliographies. Brings together contributions from leading researchers. Develops the techniques needed to carry out computational econometrics. Features network studies, non-parametric estimation, optimization techniques, Bayesian estimation and inference, testing methods, time-series analysis, linear and nonlinear methods, VAR analysis, bootstrapping developments, signal extraction, software history and evaluation. This book will appeal to econometricians, financial statisticians, econometric researchers and students of econometrics at both graduate and advanced undergraduate levels.
Download or read book Is There a Risk and Return Relation written by Suzanne G.M. Fifield and published by . This book was released on 2017 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditional finance theory posits that the relationship between the risk and return of stocks is positive. Furthermore, investment practice is often based on the central contention of the Capital Asset Pricing Model (CAPM) that high (low) beta stocks earn higher (lower) returns. However, this fundamental return and risk relationship is questioned by a several researchers who assert that the relationship is, in fact, negative. Consequently, a growing body of research examines the nature of the stock return-risk relationship using both market- and firm-level data. The results of this research are mixed. The purpose of this paper is to shed further light on this relationship by (i) examining both market- and firm-level price data; (ii) employing a battery of tests, including individual market, panel and quantile regressions; and (iii) analysing the nature of the relationship during periods of high and low volatility and in bull and bear markets. The results indicate that there is no single robust relationship between risk and return. Of note, our results suggest a positive relationship when returns are high and during bear markets. Furthermore, the finding of a positive relationship is stronger (i) at the market-level than the firm-level; and (ii) over long time periods. However, the analysis indicates that a negative relationship exists at low return levels, during bull markets and, more so, at the individual firm level. Overall, the results suggest that the risk-return relationship is switching in nature and is primarily driven by changing risk preferences. Notably, a positive relationship exists when macroeconomic risk plays a larger role.
Download or read book Unconverting the Risk return Relation in the Stock Market written by Hui Guo and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Risk Return Relation in International Stock Markets written by Hui Guo and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the risk-return relation in international stock markets using realized variance constructed from MSCI (Morgan Stanley Capital International) daily stock price indexes. In contrast with CAPM, realized variance by itself provides negligible information about future excess stock market returns; however, we uncover a positive and significant risk-return tradeoff in many countries after controlling for the (U.S.) consumption-wealth ratio. U.S. realized variance is also significantly related to future international stock market returns; more importantly, it always subsumes the information content of its local counterparts. Our results indicate that stock market variance is an important determinant of the equity premium.
Download or read book On the Risk Return Relation in International Stock Markets Forthcoming written by Hui Guo and published by . This book was released on 2013 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the risk-return relation in international stock markets using realized variance constructed from MSCI (Morgan Stanley Capital International) daily stock price indices. In contrast with CAPM, realized variance by itself provides negligible information about future excess stock market returns; however, we uncover a positive and significant risk-return tradeoff in many countries after controlling for the (U.S.) consumption-wealth ratio. U.S. realized variance is also significantly related to future international stock market returns; more importantly, it always subsumes the information content of its local counterparts. Our results indicate that stock market variance is an important determinant of the equity premium.
Download or read book Risk Return and Portfolio Theory A Contextual Note written by Samithamby Senthilnathan and published by . This book was released on 2015 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: In investment, particularly in the portfolio management, the risk and returns are two crucial measures in making investment decisions. This paper attempts to provide a brief theoretical explanation with examples on determining the returns and associated risk of shares, and of the portfolio of the shares. The illustrations of tables and figures can significantly contribute to the understanding of a reader in relation to portfolio management of risk and returns. The illustrative table and figures are the significance of this paper and it is believed that the reader of this paper would gain reasonable knowledge in portfolio management.
