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**Unformatted text preview: **E(r) = R f + Risk Premium = R f + (p*q) % return = 1 period forward rate = div yield + capital gain yield P t+t b price + dividend in period t+1 Arithmetic Avg: use this to find Usually not correct because it over estimates the rate Arithmetic avg is more forward looking, thats why we use it for Geometric Avg: assume compounding = [(1+r 1 ) (1+r 2 ) (1+r t )] ^(1/t) -1 t = total # days given -1 HPR : over the entire period You are finding the t year interest rate 1 ... 1 V V 1 1 1 1 2 2 1 1 T- + + + =- =-- T T T T P Div P P Div P P Div P E(R) = R b expected return + + = T R ... R T 1 SD 1 ) ( ... ) ( 2 2 1-- + +- = = T R R R R Var T * use T-1 ONLY when the total number of data is given but NO probabilities. *when you are given the probabilities, use the prob!! 68.26% time falls w/in 1 95.44% time falls w/in 2 99.74% time falls w/in 3 Cov a,b = ... ) (R ) (R * Prob ) (R ) (R * Prob b2 a2 b1 a1 +-- +-- b a b a R R R R *if prob is not given, use prob= 1- T 1 Corr= b a b a b a, , Cov = Var portfolio ab b a b a p 2 2 2 2 2 2 + + = b a, Cov b a, 2 2 2 2 2 b a b a ab b a + + = If =-1 ; you can reduce to 0 by choosing the following weights: b a b W + = a b a a W + = b If =+1 , reduction in =reduction in return So p = weighted avg between indivi stocks Efficient frontier = the portfolio that has the same risk as others but higher return You can always move along the efficient frontier by ing the weights Minimum variance portfolio is the left most position that can be reached by the curve Systematic risk = mkt risk b Cov Unsystematic risk = diversifiable risk b Total risk of security = systematic risk + unsystematic risk r Asset 1 Asset 2 Asset 3 Asset 1 W 1 2 1 2 W 1 W 2 1,2 W 1 W 3 1,3 Asset 2 W 1 W 2 1,2 W 2 2 2 2 W 2 W 3 2,3 Asset 3 W 1 W 3 1,3 W 2 W 3 2,3 W 3 2 3 2 Measurement of risk 1. Single security = SD of the return...

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