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【正文】 ing capital gains or losses, as a fraction of its price 169。2020 Pearson Education, Inc. Chapter 5 91 The Demand for Risky Assets ?Individuals hope to have an asset that has returns larger than the rate of inflation ?Want to have greater purchasing power ?Real Return of an Asset (inflation adjusted) ?The simple (or nominal) return less the rate of inflation 169。2020 Pearson Education, Inc. Chapter 5 92 The Demand for Risky Assets ?Since returns are not known with certainty, investors often make decisions based on expected returns ?Expected Return ?Return that an asset should earn on average ?In the end, the actual return could be higher or lower than the expected return 169。2020 Pearson Education, Inc. Chapter 5 93 Investments – Risk and Return (19261999) 169。2020 Pearson Education, Inc. Chapter 5 94 The Demand for Risky Assets ?The higher the return, the greater the risk ?Investors will choose lower return investments in order to reduce risk ?A riskaverse investor must balance risk relative to return ?Must study the tradeoff between return and risk 169。2020 Pearson Education, Inc. Chapter 5 95 Tradeoffs: Risk and Returns Example ? An investor is choosing between TBills and stocks: 1. Tbills – riskless 2. Stocks – risky ? Investor can choose only Tbills, only stocks, or some bination of both 169。2020 Pearson Education, Inc. Chapter 5 96 Tradeoffs: Risk and Returns Example ?Rf = riskfree return on Tbill ?Expected return equals actual return on a riskless asset ?Rm = the expected return on stocks ?rm = the actual returns on stock ?Assume Rm Rf or no risk averse investor would buy the stocks 169。2020 Pearson Education, Inc. Chapter 5 97 Tradeoffs: Risk and Returns Example ?How do we determine the allocation of funds between the two choices? ?b = fraction of funds placed in stocks ?(1b) = fraction of funds placed in Tbills ?Expected return on portfolio is weighted average of expected return on the two assets fmP RbbRR )1( ???169。2020 Pearson Education, Inc. Chapter 5 98 Tradeoffs: Risk and Returns Example ?Assume, Rm = 12%, Rf = 4%, and b = 1/2 %8%)4)(2/11(%)12)(2/1()1(???????PPfmPRRRbbRR169。2020 Pearson Education, Inc. Chapter 5 99 Tradeoffs: Risk and Returns Example ?How risky is the portfolio? ?As stated before, one measure of risk is standard deviation ?Standard deviation of the risky asset, ?m ?Standard deviation of risky portfolio, ?p ?Can show that: mp b ?? ?169。2020 Pearson Education, Inc. Chapter 5 100 Tradeoffs: Risk and Returns Example ?We still need to figure out the allocation between the investment choices ?A type of budget line can be constructed describing the tradeoff between risk and expected return 169。2020 Pearson Education, Inc. Chapter 5 101 Tradeoffs: Risk and Returns Example ?Expected return on the portfolio, rp increases as the standard deviation, ?p of that return increases pmfmfpfmpRRRRRbbRR??)()1(??????169。2020 Pearson Education, Inc. Chapter 5 102 Tradeoffs: Risk and Returns Example ?The slope of the line is called the price of risk ?Tells how much extra risk an investor must incur to enjoy a higher expected return mfm )/R(R S l o p e ???169。2020 Pearson Education, Inc. Chapter 5 103 Choosing Between Risk and Return ?If all funds are invested in Tbills (b=0), expected return is Rf ?If all funds are invested in stocks (b=1), expected return is Rm but with standard deviation of ?m ?Funds may be invested between the assets with expected return between Rf and Rm, with standard deviation between ?m and 0 169。2020 Pearson Education, Inc. Chapter 5 104 Choosing Between Risk and Return ?We can draw indifference curves showing binations of risk and return that leave an investor equally satisfied ?Comparing the payoffs and risk between the two investment choices and the preferences of the investor, the optimal portfolio choice can be determined ?Investor wants to maximize utility within the “affordable” options 169。2020 Pearson Education, Inc. Chapter 5 105 Choosing Between Risk and Return p R e t u r n , of D e v ia t io n S t a n d a r d ?Expected Return,Rp U2 is the optimal choice since it gives the highest return for a given risk and is still affordable Rf Budget Line m?Rm ??R* U2 U1 U3 169。2020 Pearson Education, Inc. Chapter 5 106 Choosing Between Risk and Return ? Different investors have different attitudes toward risk ? If we consider a very risk averse investor (A) ?Portfolio will contain mostly Tbills and less in stock, with return slightly larger than Rf ? If we consider a riskier investor (B) ?Portfolio will contain mostly stock and less Tbills, with a higher return Rb but with higher standard deviation 169。2020 Pearson Education, Inc. Chapter 5 107 The Choices of Two Different Investors Expected Return,Rp p R e t u r n , of D e v ia t io n S t a n d a r d ?Given the same budget line, investor A chooses low return/low risk, while investor B chooses high return/high risk. UA RA A?UB Rf Budget line m?Rm RB B?169。2020 Pearson Education, Inc. Chapter 5 108 Investing in the Stock Market ?In 1990’s many people began investing in the stock market for the first time ?Percent of US families who had directly or indirectly invested in the stock market ? 1989 = 32% ? 1998 = 49% ?Percent with share of wealth in stock market ? 1989 = 26% ? 1998 = 54% 169。2020 Pearson Education, Inc. Chapter 5 109 Investing in the Stock Market ?Why were stock market investments increasing during the 90’s? ?Ease of online trading ?Significant increase in stock prices during late 90’s ?Employers shifting to selfdirected retirement plans ?Publicity for “do it yourself