CH 8 - Risk, Return, & Portfolio Theory Flashcards
What is the ex-post return?
Ex-post is based on events that have already taken place.
Actual returns earned
Sum of income yield and capital gain yield
What is the income yield?
The return earned on the income portion of the investment
- Bond investments: Coupon
- Equity investments: Dividends
- Real estate investments: Rent
What is a capital gain return?
A capital gain is the increase in the price of an asset from when it was purchased until when it was sold.
What is a capital loss return?
A capital loss in the decrease in the price of an asset from when it was purchased until when it was sold.
What are the two types of average returns?
Arithmetic average, geometric average
What is an arithmetic average?
Sum of individual returns divided by number of periods
o Not used to evaluate investments because it does not consider compounding.
o Tends to overstate average returns.
What is the geometric average?
Average of returns with compounding.
What is a portfolio?
Collection of financial investments
The proportion of the portfolio held by one investment is called the weight.
What does a correlation of 1 mean?
It means that it is a perfect positive correlation
Investing in stocks with perfect positive correlation is pointless and creates
absolutely no diversification
What does a correlation of -1 mean?
It means that it is a perfect negative correlation
Investing in stocks with a perfect negative correlation maximizes diversification.
