Exam 1 - Chapter 5 - [SLIDES] Flashcards
What are the two types of return
- Dollar weighted return
2. Time weighted return
What’s Holding-Period Return (HPR)
Rate of return over a given investment period
Formula for Holding-Period Return
P^e - P^b + D
———————
P^b
P^e =
Ending price
P^b=
Beginning price
What is ex-post?
After the fact
What is ex-anti
Before the fact
Risk
If there is a possibility that your prediction is wrong its called risky
HPR risk-free
If we know the HPR at the time of investing
HPR
Risky investment
If we do not know the HPR at the time of investing
Why do we focus on the past?
To forecast the future
What should you include in your forecast?
Small % of Error
___ ______ as a predictor
Arthimetic average
Geometric average as a ______ measure
Performance
There are two ways of measuring
- `Time-weighted rate of return
2. Dollar-weighted rate of return
Time weighted return
Geometric average
Dollar weighted return uses the
Internal rate of return
The portfolio HPR is the
Weighted average of individual asset HPR
Expectation is what type of figure?
AVERAGE
R(S)
Rate of return
We use standard deviation as a reason for?
Volatility
___ is an incomplete risk measure
Sigma
Risk averse investors are
reluctant to accept risk unless there is an enough compensation for the risk
What’s the opposite of risk averse?
Risk lover
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
Risk premium definition
An additional required return over risk-free rate for a risky asset is called risk premium for the asset
Excess return or risk premium =
E[r] - r^f
If you require 10% risk premium for taking 20% risk(std), what excess return per 1% risk(std) are you asking for ?
0.50
Risk premium / standard deviation =
Sharpe ratio
Sharpe ratio =
Risk premium / standard deviation
Real returns have been much hire for _____ than for bonds
Stocks
Sharpe ratios measures the
Excess return to standard deviation
The higher the Sharpe ratio, the better the ______ ______
Average return
_____ have had much hire Sharpe ratios than bonds
Stocks
Complete portfolio
Spilt investment funds between safe and risky assets is called complete portfolio
R^f
Risk free asset
R^p
Risky portfolio
Risk portfolio
Stock portfolio
Risk free
T-bills or money market fund
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%
The portfolio including risk-free is called a “___ ____”
Complete portfolio
The expected return and risk for complete portfolios are _______ in wp
(Important)
Wp
Capital allocation line
-
Greater levels of risk aversion lead investor to choose
Large proportions of the risk free rate
Lower levels of risk aversion lead investor to choose
Large proportions of the portfolio of risky assets
Willingness to accept high level of risk for
High levels of returns would result in leveraged combinations
