Chapter 3: Risk & Return Flashcards
Arithmetic Mean Return (AMR)
estimates a typical period’s return, but does not account for compounding interest.
Geometric Mean Return (GMR)
is superior to AMR and accounts for compounding interest in time-weighted return calculations.
Dollar-Weighted Return (AKA IRR)
shows the true typical return given an investor’s contributions to an distributions from an investment portfolio.
which kind of risk can be diversified away?
Unsystematic Risk
what does the standard deviation measure?
a portfolio’s total variability
What does Beta measure?
a diversified portfolio’s systematic risk exposure relative to the overall market
Holding Period Return (HPR) Calculation
(Selling price - purchase price)
+/- Cash Flows
/
Purchase Price
Which Return type is also known as the Geometric Mean Return (GMR)?
Time Weighted Return
Which Return type is also known as the Internal Rate of Return (IRR)?
Dollar Weighted Return
is exchange rate risk systematic or unsystematic?
systematic
what is covarience?
the degree at which two assets move together.
what kind of risk does Beta measure?
Only systematic risk
How do you find Beta?
Beta =
the standard deviation
* correlation
/ standard deviation of the market
what does financial risk magnify?
gains and losses
What does the coefficient of a variation measure?
Risk per unit of return
