Lecture 2

Question 1

What are the two components of the return on a share in any given period?

Answer 1

1. Capital gains over he holding period
2. Dividend payments over the holding period

Question 2

How do you calculate return?

Answer 2

Gain in wealth/initial wealth

Question 3

What is a discrete probability distribution?

Answer 3

Has a finite number of outcomes where the probability of each outcome is known
Sum of these must equal 100 bc there’s a 100% probability that one of the outcomes will occur

Question 4

What is a continuous probability distribution?

Answer 4

It has an infinite number of outcomes
Probability of a specific outcome is indistinguishable from zero

Probability can only be expressed over a range of values (equal to the area under the curve between the two cut off points)
Total area under the function is 1

Question 5

To describe a distribution, what does one need?

Answer 5

A measure of central tendency - the mean, aka expected value
A measure of dispersion - the standard deviation or the variance

Question 6

How do you calculate the mean?

Answer 6

Sum of probability x return

Question 7

How do you calculate the variance?

Answer 7

The sum of probability multiplied by (the return - the mean)^2

Question 8

How do you calculate the standard deviation?

Answer 8

Square root the variance