RELATIONSHIP BETWEEN THE RISK AND RETURN - Accounts and Finance for Managers

  • Total Return - Risk free rate of return= Excess return (Risk premium)
  • Total return = Risk free return + Risk premium

Kj = Rf + bj (Km–Rf)

Bj is nothing but Beta of the security i.e., market responsiveness of the security. Beta differs from one security to another.

It is normally expressed as a β

β=
Non Diversifiable risk of asset or Portfolio
Risk of the Market Portfolio


Risk of the portfolio = After diversification, the risk of the market portfolio is non diversifiable


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