Risk and History

Question 1

What is a dividend yield and how is it calculated?

Answer 1

• Dividend yield is the financial ratio that measures the cash dividends paid out to shareholders relative to the market value per share
• Calculates as: Dividends paid / Initial price

Question 2

What is a capital gains yield?

Answer 2

• Capital Gains Yield is the price appreciation of an investment or a security expressed as a percentage
• Calculates as: Change in market value / Initial price

Question 3

What is standard deviation?

Answer 3

• Calculates the dispersion of a set of data values

Question 4

What is variance?

Answer 4

measures how far a data set is spread out

Question 5

What is average return?

Answer 5

All returns divided by the number of returns

Question 6

What is risk premium?

Answer 6

• Risk premium is the added return(above the risk-free rate) resulting from bearing risk

Question 7

Explain the connection between historical returns and risks on various types of investments

Answer 7

• The most rewarding investments have the most volatile returns and visa versa
• Average excess return from large company: 8,4%
• Average excess return for small company: 13%
• Average excess return form long-term corporate bonds: 2,8%
• Average Market Risk Premiums are 6,9%

Question 8

Why is the normal distribution informative?

Answer 8

• Because you can calculate the probability of the return on your investment

Question 9

What is the difference between arithmetic and geometric averages?

Answer 9

• Arithmetic average is the return earned in an average period over multiple periods
• Geometric average is the average compound return per period over multiple periods