# Investment types and risks

Feb 3rd, 2012
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The rate of return on an investment can be calculated as stated in this paper

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Ch??ng 1 R?i ro v t? su?t l?i nhu?n1. 2. 3. 4. 5.L?i nhu?n :cc khi ni?m c? b?n R?i ro: cc khi ni?m c? b?n R?i ro ring l? R?i ro th? tr??ng (r?i ro danh m?c) R?i ro v l?i nhu?n: CAPM/SML 1-1 Investment returnsThe rate of return on an investment can be calculated as follows: Return =(Amount received - Amount invested) ________________________ Amount investedFor example, if \$1,000 is invested and \$1,100 is returned after one year, the rate of return for this investment is: (\$1,100 - \$1,000) / \$1,000 = 10%. 1-2 What is investment risk?Two types of investment riskStand-alone risk Portfolio riskInvestment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns, the riskier the investment. 1-3 Probability distributionsA listing of all possible outcomes, and the probability of each occurrence. Can be shown graphically. Firm XFirm Y -70 0 15 100Rate of Return (%)Expected Rate of Return1-4 Selected Realized Returns, 1926 - 2004Small-company stocks Large-company stocks L-T corporate bonds L-T governmentbonds U.S. Treasury bills Average Return 17.5% 12.4 6.2 5.8 3.8 Standard Deviation 33.1% 20.3 8.6 9.3 3.1Source: Based on Stocks, Bonds, Bills, and Inflation: (Valuation Edition) 2005 Yearbook (Chicago: Ibbotson Associates, 2005), p28. 1-5 Investment alternativesEconomy Prob. 0.1 0.2 0.4 0.2 0.1 T-Bill 5.5% 5.5% 5.5% 5.5% 5.5% HT -27.0% -7.0% 15.0% 30.0%

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