BKM CH5-I

BKM CH5-I - Chapter 5 Part I Risk and Return Learning...

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Chapter 5: Part I Risk and Return
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Learning Objectives Measuring Investment Returns Single period Multiple periods Risk and Measures of Risk Risk Premiums Risk Aversion
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Rates of Return: Single Period HPR – Holding Period Return P 1 – Ending Price P 0 – Beginning Price D 1 – Dividend at the end of holding period 0 1 0 1 P D P P HPR + - =
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Rates of Return: Single Period Ending Price = $24 Beginning Price = $20 Dividend = $1 HPR = ( 24 - 20 + 1 ) / 20 = 25%
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Rates of Return: Multiple Periods 1 2 3 4 Beg Assets ($ mil) 1.0 1.2 2.0 .8 HPR(%) .10 .25 (.20) .25 TA Before Net Inflows 1.1 1.5 1.6 1.0 Net Inflows ($ mil) 0.1 0.5 (0.8) 0.0 End Assets ($ mil) 1.2 2.0 .8 1.0
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Returns Using Arithmetic and Geometric Averaging Arithmetic r a = (r 1 + r 2 + r 3 + . .. r n ) / n r a = (.10 + .25 - .20 + .25) / 4 = .10 or 10% Geometric r g = [(1+r 1 ) (1+r 2 ) . ... (1+r n )] 1/n - 1 r g = [(1.1) (1.25) (.8) (1.25)] 1/4 - 1 = (1.5150) 1/4 -1 = .0829 = 8.29%
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BKM CH5-I - Chapter 5 Part I Risk and Return Learning...

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