Essay About Stock Price Appreciation And Portfolio Of All Drug Companies

Risk and Return
Risk and Return
Return on Investment- make money on investment, two components that contribute to our returns (dividends and stock price appreciation)
Percentage return= capital gains yield and dividend yield
Distribution is to look at a distribution of either standard deviation or variance
Stocks with greater standard deviation have will likely fall further from our expected return
The greater the volatility the greater the risk
The volatility of stocks is much higher than the volatility of bonds and T-bills
Risk increases so does return
More volatile the stock the higher the return
Portfolios (diversifying risk)-
Reduce volatility by grouping assets into portfolios
Example- the returns for a portfolio of all drug companies will have much less volatility than that of a single drug company
Example- portfolio for all companies would be less risky than one sector
Two types of risk
Firm specific risk- can be diversified with a portfolio
Market level risk, Non-diversifiable risk- cannot be eliminated
Companies can’t control market level risk
As we include more stocks in the portfolio the volatility of returns lessens
More stocks the less risk there is of falling below of return expectations
How does diversification work
If two stocks are perfectly positively correlated, diversification has no effect on risk
Want less than perfect correlation
Any risks that can be diversified away will not be compensated
Measuring Risk: Beta