R&R Flashcards
Risk
The standard deviation of returns.
Return from an Investment
The percentage change in value over the life of the investment.
HPR
Holding Period Return: for a single time period, it is the sum of capital gain and income returns; (new value - old value) / old value.
Capital Gain/Appreciation
the return from the change in value of the investment; (sale price - purchase price) / purchase price.
Income Returns
the return from any payments on interest or dividends from the investment; income received / purchase price.
Statistical Variance Equation: regular
sum((x - mean)^2)/(n-1)
Statistical Variance Equation: Probability
sum((x - mean)^2*P(x))
Portfolio
Collection of 2 or more assets.
Expected Return of a Portfolio
weighted average of expected returns. Ex: 0.70 * 5% + 0.30 * 8%
Variables in the Variance of a Portfolio Equation
weight, STD/variance, covariance, and correlation coefficient.
Difference between expected return and standard deviation of return?
They are correlated and tend to move in opposite directions.
Shape of the CAPM Model?
y = 1/x + 1; The area above the asymptote is diversifiable risk and the area below the asymptote is systematic/market/non-diversifiable risk.
Diversifiable Risk
When randomly selecting stocks for a portfolio, the more you buy, the lower the risk. This bottoms out at an amount that is non-diversifiable/Systematic/Market risk.
Which type of risk actually matters (diversifiable or non-diversifiable)?
non-diversifiable/market/systematic risk
Beta
the measure of the tendency of a stock’s returns to move with (or opposite) of the market. Larger Beta is when a stock is more sensitive to market movements and therefore has more systematic risk; can go above 1.
