Exam 1 - Chapter 5 - [SLIDES] Flashcards

1
Q

What are the two types of return

A
  1. Dollar weighted return

2. Time weighted return

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2
Q

What’s Holding-Period Return (HPR)

A

Rate of return over a given investment period

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3
Q

Formula for Holding-Period Return

A

P^e - P^b + D
———————
P^b

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4
Q

P^e =

A

Ending price

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5
Q

P^b=

A

Beginning price

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6
Q

What is ex-post?

A

After the fact

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7
Q

What is ex-anti

A

Before the fact

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8
Q

Risk

A

If there is a possibility that your prediction is wrong its called risky

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9
Q

HPR risk-free

A

If we know the HPR at the time of investing

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10
Q

HPR

Risky investment

A

If we do not know the HPR at the time of investing

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11
Q

Why do we focus on the past?

A

To forecast the future

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12
Q

What should you include in your forecast?

A

Small % of Error

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13
Q

___ ______ as a predictor

A

Arthimetic average

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14
Q

Geometric average as a ______ measure

A

Performance

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15
Q

There are two ways of measuring

A
  1. `Time-weighted rate of return

2. Dollar-weighted rate of return

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16
Q

Time weighted return

A

Geometric average

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17
Q

Dollar weighted return uses the

A

Internal rate of return

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18
Q

The portfolio HPR is the

A

Weighted average of individual asset HPR

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19
Q

Expectation is what type of figure?

20
Q

R(S)

A

Rate of return

21
Q

We use standard deviation as a reason for?

A

Volatility

22
Q

___ is an incomplete risk measure

23
Q

Risk averse investors are

A

reluctant to accept risk unless there is an enough compensation for the risk

24
Q

What’s the opposite of risk averse?

A

Risk lover

25
Investor would require a _____ return for higher risk by asking for so-called risk premium (This is equivalent to asking for lowering the purchase price)
Higher
26
Risk premium definition
An additional required return over risk-free rate for a risky asset is called risk premium for the asset
27
Excess return or risk premium =
E[r] - r^f
28
If you require 10% risk premium for taking 20% risk(std), what excess return per 1% risk(std) are you asking for ?
0.50
29
Risk premium / standard deviation =
Sharpe ratio
30
Sharpe ratio =
Risk premium / standard deviation
31
Real returns have been much hire for _____ than for bonds
Stocks
32
Sharpe ratios measures the
Excess return to standard deviation
33
The higher the Sharpe ratio, the better the ______ ______
Average return
34
_____ have had much hire Sharpe ratios than bonds
Stocks
35
Complete portfolio
Spilt investment funds between safe and risky assets is called complete portfolio
36
R^f
Risk free asset
37
R^p
Risky portfolio
38
Risk portfolio
Stock portfolio
39
Risk free
T-bills or money market fund
40
Example: your total wealth is $10,000. You put $2,500 in risk free t-bills and $7,500 in a stock portfolio. Thus,
``` Wp = 75% Wf = 25% ```
41
The portfolio including risk-free is called a “___ ____”
Complete portfolio
42
The expected return and risk for complete portfolios are _______ in wp (Important)
Wp
43
Capital allocation line
-
44
Greater levels of risk aversion lead investor to choose
Large proportions of the risk free rate
45
Lower levels of risk aversion lead investor to choose
Large proportions of the portfolio of risky assets
46
Willingness to accept high level of risk for
High levels of returns would result in leveraged combinations