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

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

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

Â Were sort of continuing each other.

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

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

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

Â We still have a couple uses for that data set.

Â We're also,

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

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

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

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

Â If you remember.

Â In this first session,

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

Â We talked about risk and return.

Â And we looked at two ways of assessing returns.

Â In particular mean returns.

Â We talked about arithmetic mean returns and geometric mean returns.

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

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

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

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

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

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

Â And, by going hand in hand,

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

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

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

Â Is basically what risk and return are all about.

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

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

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

Â Now, this positive relationship between the two.

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

Â So that positive relationship basically, these basically means that

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

Â Because you expect a higher return from that particular asset.

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

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

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

Â A higher level of return.

Â And that thing's something important for

Â you to keep in mind the possible relationship between risk and

Â return basically means that the typical investor is risk adverse.

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

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

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

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

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

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

Â And that is quantified by volatility.

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

Â a lot of that risk actually vanishes, diversifies away.

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

Â that is what is measured by beta.

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

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

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

Â actually calculate the risk of a portfolio.

Â How we think of the risk of a portfolio.

Â Now.

Â Here comes the interesting part.

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

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

Â more often than not, in fact,

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

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

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

Â More clearly.

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

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

Â That may not be entirely clear right now, but

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

Â [MUSIC]

Â