Class 9

Class 9 - o Ex. 25% of $ in C, 75% in A: ROR = .25(Cs...

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Ch. 7: Risk and Return Risk and return: o Realized rate of return: Measures gain/ loss on an investment over a past period o Expected rate of return: What you expect to earn going forward o Variability in returns: Standard deviation is square root of variance o Arithmetic vs. geometric average rates of return: Geometric: What was the growth rate of your investment? ROR for multi-year horizon Accounts for compounding (thus, is lower than arithmetic) Arithmetic: Simply what was the average ROR of all your years ROR just for next year No look at return on portfolio of securities (more than 1):
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Unformatted text preview: o Ex. 25% of $ in C, 75% in A: ROR = .25(Cs expected ROR) + .75(As expected ROR) o Evaluating portfolio risk: Typically lower variability than its individual parts Depends on correlations between individual securities Correlation coefficients between -1 and +1 As long as investments arent perfectly correlated, there will be some reduction in risk Key is to combine securities that dont move together Simple weighted average SD is greater than SD formula that accounts for correlations Correlation of -1 is most desirable...
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Class 9 - o Ex. 25% of $ in C, 75% in A: ROR = .25(Cs...

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