Beruflich Dokumente
Kultur Dokumente
(Part I)
Han Ozsoylev
EFIN/MFIN 301, Fall 2014
N
X
pi ri
i=1
But what is risk? Risk in finance is usually associated to the idea of volatility or dispersion and
frequently measured using the variance or the
standard deviation of returns. The variance is
the expected squared deviation from the mean.
Formally, if an investment has possible returns
r1 , r2 , . . ., rN , with respective probabilities p1 ,
p2 , . . ., pN , its variance of returns is
i = E [r] = rf + i (M rf ) ,
where rf is the risk-free rate of return and M
is the expected return on the market portfolio.
M rf is often referred to as the market risk
premium. The risk contribution of an individual
investment to the market risk is measured by its
market beta, and this determines the expected
return from the security.