Search results
Results From The WOW.Com Content Network
In the stock market the risk premium is the expected return of a company stock, a group of company stocks, or a portfolio of all stock market company stocks, minus the risk-free rate. [6] The return from equity is the sum of the dividend yield and capital gains and the risk free rate can be a treasury bond yield. [7]
This line starts at the risk-free rate and rises as risk rises. The line will tend to be straight, and will be straight at equilibrium (see discussion below on domination). For any particular investment type, the line drawn from the risk-free rate on the vertical axis to the risk-return point for that investment has a slope called the Sharpe ratio.
The t-statistic will equal the Sharpe Ratio times the square root of T (the number of returns used for the calculation). The ex-post Sharpe ratio uses the same equation as the one above but with realized returns of the asset and benchmark rather than expected returns; see the second example below.
The term () represents the movement of the market modified by the stock's beta, while represents the unsystematic risk of the security due to firm-specific factors. Macroeconomic events, such as changes in interest rates or the cost of labor, causes the systematic risk that affects the returns of all stocks, and the firm-specific events are the ...
An estimation of the CAPM and the security market line (purple) for the Dow Jones Industrial Average over 3 years for monthly data.. In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.
An example capital allocation line. As illustrated by the article, the slope dictates the amount of return that comes with a certain level of risk. Capital allocation line (CAL) is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays the return to be made by taking on a certain level of risk.
Get AOL Mail for FREE! Manage your email like never before with travel, photo & document views. Personalize your inbox with themes & tabs. You've Got Mail!
The risk-return ratio is then defined and measured, for a specific time period, as: = / Note that dividing a percentage numerator by a percentage denominator renders a single number. This RRR number is a measure of the return in terms of risk.