Module 2 - Shares & Risk

Question 1

The return on a share in any given period has what two components?

Answer 1

• Capital gains over the holding period (Pt - P(t-1));
• Dividend payments over the holding period, Dt.

Question 2

How do you calculate return?

Answer 2

Gain in wealth / Initial wealth

Question 3

How do you calculate return on a share?

Answer 3

(Pt - Pt-1 + Dt) / (Pt-1)

(Numerator captures your gain in wealth & denominator captures your initial wealth).

Question 4

How do you calculate the wealth relative?

Answer 4

End of period wealth / Beginning of period wealth
OR
1 / R(t)
1 / return on a share

Question 5

How do you calculate the holding period wealth relative?

Answer 5

WR1 x WR2 x … x WRn

Question 6

Describe a describe probability distribution.

Answer 6

Has a finite number of outcomes, where the probability of each outcome is known. The sum of these probabilities equals one; there is a 100% probability of one of the outcomes coming true, e.g. coin toss.

Question 7

Describe continuous probability distributions.

Answer 7

Has an infinite number of outcomes, where the probability of a specific number of outcomes is indistinguishable from zero. We can only express the probability over a range of values, which is equal to the area under the curve between the two cut-off points.

Question 8

What two things do you need to describe a distribution?

Answer 8

A measure of central tenancy - the mean, aka the expected value;

A measure of dispersion - the standard deviation, or the variance.

Question 9

How do you calculate the mean?

Answer 9

E(R) = Σ𝑝𝑖𝑅𝑖

Question 10

How do you calculate the variance?

Answer 10

𝜎^2 = Σ𝑝𝑖(𝑅𝑖 − E(R) )^2