Book 1_Quan_Rate and returns Flashcards
- Equilibrium interest rates
+ the required rate of return for a particular investment
+ discount rates
+ opportunity cost
- The real risk-free rate of interest
+ a theoretical rate on a single-period loan that contains no expectation of inflation and zero probability of default
+ time preference, the degree to which current consumption is preferred to equal future consumption
- nominal risk-FREE rate
+ (1 + nominal risk-free rate) = (1 + real risk-free rate)(1 + expected inflation rate)
+ nominal risk-free rate ≈ real risk-free rate + expected inflation rate
- Securities risk:
+ Default risk: not make the promised payments
+ Liquidity risk: receiving less than fair value for an investment if must be sold quickly for cash.
+ Maturity risk: Longer-term bonds are more volatile than those of shorter-term bonds
- Nominal risk of interest =
+ Real risk-free rate
+ inflation premium
+ default risk premium
+ liquidity premium
+ maturity premium
- Holding period return (HPR)
+ HPR = (end of period value)/(beginning of period value) – 1
- Returns over multiple periods
+ HPR = (1+ HPR1)(1+HPR2)(1+HPR3) – 1
- arithmetic mean return
+ the simple average of a series of periodic returns
+ equal (R1+R2+R3+…+R)/n
- geometric mean return
+ a compound rate
= Căn N (1+r1)(1+r2)…(1+rn) - 1
- A harmonic mean
+ used for certain computations, such as the average cost of shares purchased over time
+ Calculate the average share cost from periodic purchases in a fixed money amount.
+ mean = 3 / (1/8 + 1/9 + 1/10)
- arithmetic average:
+ Assuming buy the same number of shares
- Trimmed mean or winsorized mean:
+ are used to reduce the effect of outlier
+ A 1% trimmed mean, for example, would discard the lowest 0.5% and the highest 0.5% of the observations.
+ winsorized mean. Instead of discarding the highest and lowest observations, we substitute a value for them.
Real interest rate
- An interest rate from which the inflation premium has been subtracted is known as a:
