9.0 Introduction
Chapter Learning Objectives
By the end of the chapter, you should be able to:
- Define the concept of risk and explain how both the probability and magnitude of outcomes impact the degree of risk.
- Identify sources of risk and differentiate between general economic risk factors and firm-specific risk factors.
- Explain the concepts of probability distributions, expected return and standard deviation for a single security.
- Calculate and interpret the expected return and standard deviation of a single security given a probability distribution.
- Explain the concept of correlation.
- Explain the concept of expected return and standard deviation for portfolios.
- Calculate and interpret the expected return and standard deviation for two-stock portfolios.
- Explain/diagram the concept and implications of portfolio diversification.
- Differentiate between firm-specific (diversifiable) risk, market (non-diversifiable) risk, and total risk.
- Identify when each risk type of risk measurement is appropriate.
- Calculate and interpret beta.
- Explain, calculate, and interpret the Capital Asset Pricing Model and Security Market Line.
- Identify potential concerns regarding the viability of the Capital Asset Pricing Model and the Security Market Line.
Attribution
“Chapter 7 – Risk Analysis” from Business Finance Essentials by Dr. Kevin Bracker; Dr. Fang Lin; and Jennifer Pursley is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.
