"03_Quant_handout

"03_Quant_handout - Lecture 2 Quantitative Review...

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Lecture 2: Quantitative Review Quantitative Review: Returns on securities and portfolios Stats: means, variances, covariances, correlations, regressions Readings: BKM chapter 5
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Review: Asset classes, securities (differ w.r.t. return/risk) Invest directly in equity Trades you can place (buy, sell,….) Where to trade Costs of trading Invest indirectly in equity (delegated portfolio management)
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33 - How to measure returns? - for securities & portfolios ± What’s an index? - How do returns behave? - random variables, means, variances - How do returns move together? - covariances and correlations Part A - Outline: - How do returns move together? - regressions Part B - Outline:
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Holding period return on a stock : Return = capital gain + dividend yield (or other income) A negative return is a loss Conventions for quoting returns 1% return = 0.01 44 How To Measure Stock Returns? - + = = + , , -1 , , , -1 , , 1, , -1 , -1 , -1 ( - ) ( - ) i t i t i t i t i t i t i t t i t i t i t P P D P P D r P P P
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55 (Side Note): Do not sum returns over multiple periods! Ret0,4= ? Year1 Year2 Year3 Year4 Ret 0.10 0.25 -0.20 0.25 How To Measure Stock Returns?
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66 (Side Note): Know the difference between arithmetic and geometric average returns Arithmetic Average Return ra = (r1 + r2 + r3 + . .. rn) / n ra = (.10 + .25 - .20 + .25) / 4 = .10 or 10% Geometric Average Return rg = {[(1+r1) (1+r2) . ... (1+rn)]} 1/n - 1 rg = {[(1.1) (1.25) (.8) (1.25)]} 1/4 - 1 = (1.375) 1/4 -1 = .0829 = 8.29% Year1 Year2 Year3 Year4 Ret 0.10 0.25 -0.20 0.25 How To Measure Stock Returns?
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77 How To Measure Portfolio Returns? Measuring return of a portfolio : The return on a portfolio is a weighted average of the returns on the component assets N N r w r w r w + + + = = = ... r r 2 2 1 1 N 1 i i i p ϖ where ϖ i, is each asset’s portfolio weight ri, is each asset’s return
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88 Portfolio weights can be positive (a “long” position) or negative (a “short”
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"03_Quant_handout - Lecture 2 Quantitative Review...

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