Investments, tenth edition

 Capital  Allocation 

to Risky Assets 

 P

AR

T II 

     6.1 

Risk and Risk Aversion 

  In Chapter 5 we introduced the concepts of the holding-period return (HPR) and the excess 

rate of return over the risk-free rate. We also discussed estimation of the    risk  premium  

(the  expected  excess return) and the standard deviation of the excess return, which we use 

as the measure of portfolio risk. We demonstrated these concepts with a scenario analysis 

of a specific risky portfolio (Spreadsheet 5.1). To emphasize that bearing risk typically 

must be accompanied by a reward in the form of a risk premium, we first differentiate 

between speculation and gambling.  

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6/18/13   8:08 PM

6/18/13   8:08 PM

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  Capital Allocation to Risky Assets  

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