(5) Risk & Return

Question 1

Rate of return

Answer 1

What you earn on an investment, stated in percentage terms

Question 2

Risk

Answer 2

A measure of how certain you are that you will receive a particular return

Question 3

Investment/holding period

Answer 3

Total return from an investment over some investment/holding period

Question 4

Capital appreciation (total holding period return component)

Answer 4

Occurs from a change in the price of the asset over the investment period

Question 5

Capital appreciation (total holding period return component): formula

Answer 5

Rca = Capital appreciation / Initial price
= P1 - P0 / P0
= ΔP / P0
(P0 = price paid at asset at time zero,
P1 = price paid at later point in time where all cash outflows must be included in calculations)

Question 6

Dividend

Answer 6

Sum of money paid regularly by company to shareholder out of its profits (or reserves)

Question 7

Income (total holding period return component)

Answer 7

Occurs from income that an investor receives from the asset while he/she owns it.

Question 8

Income (total holding period return component):

Answer 8

Ri = Cash flow / Initial price
= CF1 / P0
(CF1 is the cash flow from dividend).

Question 9

Expected return

Answer 9

The average of possible returns from an investment, where each return is weighted by the probability it will occur.

Question 10

Expected value

Answer 10

Represents the sum of the products of the possible outcomes and the probabilities that those outcomes will be realised.