Lecture 4

Question 1

Main features of common stock:

Answer 1

• Voting rights
• Rights to dividends
• Limited liability

Question 2

Dividends definition

Answer 2

Question 3

The rate of return on the stock R is defined as

Answer 3

• Invest X dollars in the stock at date 0
• Suppose that value of the stock investment at date 1 is V dollars.

Question 4

Return on the stock R between dates 0 and 1 is

Answer 4

Question 5

Properties of Covariance and Correlation

Answer 5

Question 6

Serial correlation, or auto-correlation, of a stock - what?

Answer 6

the correlation between the return on a given year, and the return on the previous year.

Question 7

Realized return

Answer 7

Realized yield is the actual return earned during the holding period for an investment, and may include dividends, interest payments and other cash distributions. The term may be applied to a bond sold prior to its maturity date or a dividend-paying security. Generally speaking, the realized yield on bonds includes the coupon payments received during the holding period, plus or minus the change in the value of the original investment, calculated on an annual basis.

Question 8

Expected returns

Answer 8

Expected return is the amount of profit or loss an investor anticipates on an investment that has various known or expected rates of return. It is calculated by multiplying potential outcomes by the chances of them occurring, and summing these results. For example, if an investment has a 50% chance of gaining 20% and a 50% change of losing 10%, the expected return is (50% x 20% + 50% x -10%), or 5%.

Question 9

Joint probablility distribution

Answer 9

given at least two random variables X, Y, …, that are defined on a probability space, the joint probability distribution for X, Y, … is a probability distribution that gives the probability that each of X, Y, … falls in any particular range or discrete set of values specified for that variable.