Risk Tolerance
Systematic Risk
Using the CAPM model and the following assumptions, we can compute the expected return of a stock in
this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected
market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)).
The security market line is a useful tool in determining whether an asset being considered for a portfolio
offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the
security's risk versus expected return is plotted above the SML, it is undervalued because the investor
can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because
the investor would be accepting less return for the amount of risk assumed.
AUD/USD (Australian Dollar/U.S. Dollar)
Trading the AUD/USD currency pair is also known as trading the "Aussie".
The AUD/USD is affected by factors that influence the value of the Australian dollar and/or the U.S. dollar
in relation to each other and other currencies. For this reason, the interest rate differential between the
Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) will affect the value of these currencies
when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar
stronger, for example, the value of the AUD/USD cross could decline, due to a strengthening of the U.S.
dollar when compared to the Australian dollar.
The AUD/USD tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs
because the AUD/USD is quoted in U.S. dollars, while the others are not. The correlation with USD/CAD
could also be due to the positive correlation of the Canadian dollar and the Australian dollar (because
they both have similar economic structures because they are both resource-based economies).