Portfolio Risk And Retrun

Question 1

Holding Period Return (HPR)

Answer 1

(Ending P + Dividend) / P0

Question 2

Gross return

Answer 2

The total return on a security portfolio before deducting fees for the management and administration of the investment account.

Question 3

Pretax nominal return

Answer 3

Return prior to paying taxes.

Question 4

After-tax nominal return

Answer 4

The return after the tax liability is deducted. Dividend income, interest income, short-term capital gains, and long-term capital gains may all be taxed at different rates.

Question 5

Real return

Answer 5

is nominal return adjusted for inflation.

Ex: a nominal return of 7% over year when inflation is 2%. The investor’s approximate real return is simply 7 - 2 = 5%.

Real return measures the increase in an investor’s purchasing power: how much more goods she can purchase at the end of one year due to the increase in the value of her investment.

Question 6

Characteristics of the major asset classes

Answer 6

Average return S.D.

▪️Small-cap stock 12.1% 31.7%
▪️Large-cap stock 10.2% 19.8%
▪️Long-term corporate bond 6.1% 8.3%
▪️Long-term government bond 5.5% 9.9%
▪️Teasury bill 3.4% 3.1%
———————————
Inflation 2.9% 4.0%

Question 7

Risk-averse / Risk-seeking / Risk-neutral

Answer 7

▪️Risk-averse: one that dislikes risk. Given two investments that have equal expected returns, he will choose the one with less risk. 😟

▪️ Risk-seeking: one would prefer more risk to less and, given equl expected returns, would prefer the more risky investment. 😙

▪️Risk-neutral: no preference regarding risk, indifferent betweeen any two investments with equal expected return. 😶