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Section 1 - ECON 136 Financial Economics Section 1(Aug 28th...

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ECON 136: Financial Economics Section 1 (Aug 28th) Xing Huang 1 Economics Department, UC Berkeley 1 General Information GSI: Xing Huang Email: [email protected] (Please write "Econ 136" in the subject) Section Times and Locations: Fri 1pm - 2pm, 106 Wheeler Fri 4pm - 5pm, 101 Wheeler O¢ ce Hours: Fri 2pm - 4pm, 608-1 Evans 2 Return Notation Gross simple return 1 + R t +1 P t +1 + D t +1 P t Net simple return R t +1 P t +1 + D t +1 P t ± 1 = P t +1 P t P t (capital gain) + D t +1 P t (dividend yield) Gross compound return 1 + R t;t + s (1 + R t +1 )(1 + R t +2 ) : : : (1 + R t + s ) Arithmetic average return R A t;t + s 1 s ² s X i =1 R t + i Geometric average return R G t;t + s s v u u t s Y i =1 (1 + R t + i ) ± 1 Log simple return r t +1 log(1 + R t +1 ) Log compound return r t;t + s r t +1 + r t +2 + : : : + r t + s Arithmetic average log return r t;t + s 1 s ² s X i =1 r t + i = log( R G t;t + s + 1) 1 Thank you all very much !! 1

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2.2 Nominal Return and Real Return Nominal Return: P t +1 + D t +1 P t Real Return: ( P t +1 + D t +1 ) =CPI t +1 P t =CPI t = 1+ R t +1 t +1 ± e R t +1 t +1 ± 1 + R t +1 ² t +1 Log Real Return: Log ( P t +1 + D t +1 ) =CPI t +1 P t =CPI t = r t +1 ² t +1 3 Probability and Statistics Review 3.1 Random Variables In ±nance we typically model the return of a ±nancial asset as a random variable. A random vari- able can be thought of as a listing of possible numerical values as well as the probability that those values will occur. Formally, a random variable is a function that maps possible states of the world into real numbers. The probabilities express the likelihood that each of those states will occur. For example, imagine that over the next year four possible things can happen with the following probabilities: there is a 40% chance that both oil prices and GDP increase, there is a 20% chance that oil prices decrease while GDP increases, there is a 30% chance that oil prices increase while GDP decreases, and ±nally there is a 10% chance that both oil prices and GDP decrease. The following table labels each possible state ( s 1 - s 4 ) and shows its probability. s
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Section 1 - ECON 136 Financial Economics Section 1(Aug 28th...

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