CHAPTER 5 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM Investment returns The rate of return on an investment can be calculated as follows: For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%. | CHAPTER 5 4 Risk and Rates of Return Stand-alone risk Portfolio risk . Risk return CAPM SML 5-1 Investment returns The rate of return on an investment can be calculated as follows Return Amount received - Amount invested Amount invested For example if 1 000 is invested and 1 100 is returned after one year the rate of return for this investment is 1 100 - 1 000 1 000 10 . 5-2 What is investment risk Two types of investment risk Stand-alone risk Portfolio risk Investment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns the riskier the investment. .
