Hi, and welcome to the session two of this corporate finance essentials course.

You may remember from our first session that we discussed the fact that in

the road map that we gave for this course, that sessions two and one.

Were sort of continuing each other.

So, session two is a continuation of session one, in more than one respect,

were going to go back to that data set that we were looking at, were we had

returns from the US, the Spanish market, the Egyptian market, and the world market.

We still have a couple uses for that data set.

We're also,

going to use another new hypothetical, as you'll see in a minute, data set.

Plus we're going to bring some other information to illustrate the concepts and

issues that we're going to discuss in this session.

So first off, let's go back to where we finished in the last session.

If you remember.

In this first session,

we talked about mean returns and two ways of assessing risk.

We talked about risk and return.

And we looked at two ways of assessing returns.

In particular mean returns.

We talked about arithmetic mean returns and geometric mean returns.

And we talked about standard deviation and beta as two ways of assessing risk.

So with, with these two ways of assessing risk and assessing mean returns.

there, there's one more important thing before we jump into the next issues.

And that is to clarify what may be a little bit obvious.

But, we might as well clarify it just in case.

And that is that these two variables in finance always go hand in hand.

And, by going hand in hand,

we basically mean that there's a positive relationship between the two.

Risk and return are to finance what cost and benefit are to economics.

The, the good side and the bad side of the assets.

Is basically what risk and return are all about.

And you cannot really think of one without thinking about the other.

It would give you an incomplete picture of what is risk or

what is return if you don't focus on the other side of the coin.

Now, this positive relationship between the two.

Is mostly because people want to be compensated for bearing risk.

So that positive relationship basically, these basically means that

if you expose yourself to more risk, its only going to be,.

Because you expect a higher return from that particular asset.

You do not expose yourself to more risk, simply because you

like to see the value of your portfolio fluctuate more over time.

The reason why you exposed your self to risk, is because you would like to get.

A higher level of return.

And that thing's something important for

you to keep in mind the possible relationship between risk and

return basically means that the typical investor is risk adverse.

And by risk adverse we precisely mean that you expose yourself to more risks

only because you expect to be compensated with higher level of return.

Now how does that fit into the content of this session.

Well, remember that so far except for with the last bit

of the section of the first session where we said that if you put your money in,

all your money in one asset, you get to bear the whole risk of that asset.

And that is quantified by volatility.

And then if you actually put the same asset into a diversified portfolio,

a lot of that risk actually vanishes, diversifies away.

But there's a part that you actually cannot diversify away, and

that is what is measured by beta.

If you think about these two measures of risks, we went from looking at

an asset in isolation into looking at an asset in a diversified portfolio.

And that means that now we need to think a little bit about how we

actually calculate the risk of a portfolio.

How we think of the risk of a portfolio.

Now.

Here comes the interesting part.

Whenever you put two assets, two or more, but let's start with two assets together,

when you're thinking about the risk of these two asset portfolio,

more often than not, in fact,

almost always, it is going to be the case that the risk of the portfolio

is not the same as the average risk of the two assets in the portfolio.

We're going to see these in a minute a little bit more.

More clearly.

But more often than not what you going to find, is that the risk of

the portfolio is lower than the average risk of the assets in the portfolio.

That may not be entirely clear right now, but

you're going to find a way to understand in a few minutes from now.

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