Principles of Corporate Finance Seventh Edition Richard A. Brealey Stewart C

by
Matthew Will
Chapter 7
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies,

Introduction to Risk, Return, and the Opportunity Cost of Capital

Unique Risk
Diversification

Associates
Index
Year End
1
6402
2587

64.1
48.9
16.6

$1 in 1926

A measure of volatility.

Standard Deviation - Average value of squared

the portfolio across many investments.
Unique Risk - Risk factors affecting

sum of these four boxes

Coca-Cola and 35% in Reebok. The expected dollar return on

Coca-Cola and 35% in Reebok. The expected dollar return on

Coca-Cola and 35% in Reebok. The expected dollar return on

covariance terms.
STOCK
STOCK
To calculate portfolio variance add up the boxes

market risk
2. Market risk is measured by beta, the sensitivity

in the economy. In practice a broad stock market index,