Exam 1 - Chapter 5 [Book] Flashcards
holding-period return (HPR)
Rate of return over a given investment period.
HPR formula
ending price - beginning price + cash dividend
/
beginning price
arithmetic average
The sum of returns in each period divided by the number of periods.
geometric average
The single per-period return that gives the same cumulative performance as the sequence of actual returns.
dollar-weighted average return
The internal rate of return on an investment.
nominal interest rate
The interest rate in terms of nominal (not adjusted for purchasing power) dollars.
inflation rate
The rate at which prices are rising, measured as the rate of increase of the CPI.
scenario analysis
Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case.
probability distribution
List of possible outcomes with associated probabilities.
expected return
The mean value of the distribution of HPR.
variance
The expected value of the squared deviation from the mean.
standard deviation
The square root of the variance.
value at risk (VaR)
Measure of downside risk. The worst loss that will be suffered with a given probability, often 1% or 5%.
kurtosis
Measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.
skew
Measure of the asymmetry of a probability distribution.
risk-free rate
The rate of return that can be earned with certainty, often measured by the rate on Treasury bills.
risk premium
An expected return in excess of that on risk-free securities.
excess return
Rate of return in excess of the risk-free rate.
risk aversion
Reluctance to accept risk.
price of risk
The ratio of portfolio risk premium to variance.
Sharpe ratio
Ratio of portfolio risk premium to standard deviation.
mean-variance analysis
Evaluating portfolios according to their expected returns and standard deviations (or variances).
asset allocation
Portfolio choice among broad investment classes.
capital allocation to risky assets
The choice between risky and risk-free assets.
complete portfolio
The entire portfolio including risky and risk-free assets.
capital allocation line (CAL)
Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio.
passive strategy
Investment policy that avoids security analysis. Often entails indexing.
capital market line (CML)
The capital allocation line using the market index portfolio as the risky asset
