ch8 - 1. Returns A. Return = (amount received amount...

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1. Returns A. Return = (amount received – amount invested)/amount invested B. Realized return - the return received when bought & held until maturity C. Expected rate of return – rate of return expected to be realized from an investment; weighted average of the probability distribution of possible results = = r i 1NriPi Expected rate of return = (expected ending value – cost) / cost D. Required return Required return on a stock = risk free return + premium for the stock’s risk 2. Investment risk A. Related to the probability of earning a low or negative actual return B. The greater the change of lower than expected or negative returns, the riskier the investment (more risk = more return) C. Risk aversion – assumes investors dislike risk & require higher rates of return to encourage them to hold riskier securities (a) A less risky investment = risk aversion D. Risk premium – the difference between the return on a risky asset & a riskless asset, which serves as compensation for investors to hold riskier securities 3. standard deviation A. To calculate: (a) Expected rate of return = = = r i 1NriPi (b) Deviation = - ri r (c) Variance = = = ( - σ2 i 1N ri ) r 2Pi (d) Standard deviation = = = ( - ) σ i 1N ri r 2Pi Use estimated standard deviation if ONLY sample returns over some past period are available (a) Estimated σ = S = = ( - t 1N rt ) - rAvg 2N 1 B. measures total, or stand alone, risk C. the larger the standard deviation, the lower the probability that actual returns will be closer to expected returns D.
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This note was uploaded on 06/09/2009 for the course FIN 310 taught by Professor Caples during the Spring '09 term at McNeese.

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ch8 - 1. Returns A. Return = (amount received amount...

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