Return & Risk Flashcards
What forms does investment returns come in?
Dividend income, and capital gain on the investment
What does dividend income plus capital gains equal?
Total monetary return
What does dividend yield mean?
The percentage of income return
What does capital gains yield mean?
The change in the price of shares divided by the initial price
What does the total return (%) mean?
The sum of dividend yield and capital gains yield
What is holding period return?
The return you earn from holding an asset for a certain period
What does the holding period return show?
That the worth of the investment would have been if the money that was initially invested had been left in the stock market, and if each year the dividends from the previous year had been reinvested in more shares
How do you calculate the geometric average return?
Take each of the T annual returns Rt and add 1 to each, multiply all the numbers from step 1 together, take the result from step 2 and raise it to the power of 1/T, and finally, subtract 1 from the rest of step 3
What does arithmetic return mean?
Tells you what you earn in a typical year
What does geometric return mean?
Tells you what you actually earned per year on average, compounded annually
What is a risk premium?
The return on a risky asset less the return on the risk-free security. The higher the risk premium, the more risky the investment
What are government treasury bills used as?
The risk-free asset
What do T-bills never produce?
Negative returns, this debt is virtually free of the risk of default
How do we characterise the distribution of returns?
We use a measure of risk in returns
What is a risk of return?
The spread over a period, or dispersion of a distribution
What is the most common measures of variability of dispersion?
The variance and its square root, and the standard deviation
What are the steps to calculate the standard deviation?
Calculate the average return first, take the T individual returns and subtract the average return, square the result and add them up, then the total must be divided by the number of returns less one (T-1), and the square toor of the variance is the standard deviation
What is the expected return of a security?
The average return per period that a security has earned in the past
What is the volatility of a security’s return?
Variance and standard deviation
What is the interrelationship between two securities: covariance and correlation?
A measure of the degree to which returns on two securities move in relation to each other
How is covariance calculated?
Multiplying security A’s deviation from its expected return and security B’s deviation from its expected return, then calculate the average (expected) value
What is a positive covariance?
When one asset’s return is above average the other asset’s return tends to be above average, and also when one asset’s return is below average the other asset’s return tends to be below average
What is a negative covariance?
When one asset’s return is above average the other asset’s return tends to be below average
How is correlation calculated?
By dividing the covariance by the standard deviations of both the two securities - standardising procedure
