Finance 210 Study Guide
Chapter 5
Vocabulary
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Holdingperiod return Rate of return over a given investment period. (End
PriceBeg Price +Cash Dividends)/(Beg Price)
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Arithmetic average The sum of returns in each period divided by the number
of periods
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Geometric average The single perperiod return that gives the same
cumulative performance as the sequence of actual returns
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Dollarweighted average return the internal rate of return on an investment
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Scenario analysis process of devising a list of possible economic scenarios and
specifying the likelihood of each one, as well as the HPR that will be realized
in each case.
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Probability distribution List of possible outcomes with associated
probabilities
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Expected return The mean value of the distribution of HPR
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Variance The expected value of the squared deviation from the mean
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Standard deviation the square root of the variance
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Riskfree rate The rate of return that can be earned with certainty
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Risk premium An expected return in excess of that on riskfree securities
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Excess return Rate of return in excess of the Tbill rate
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Risk aversion reluctance to accept risk
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Inflation rate The rate at which prices are rising, measured as the rate of
increase of the CPI
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Nominal interest rate The interest rate in terms of nominal (not adjusted for
purchasing power) dollars.
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 Spring '08
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