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Lec%202%20-%20Portfolio%20Risk%20and%20Return

# Lec%202%20-%20Portfolio%20Risk%20and%20Return - Lecture 2...

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BANK 3004 Portfolio and Fund Management © HB, 2009 Lecture 2 TOPIC 2 Portfolio Risk and Return © HB, 2009 Risk and Return Investors hold portfolios of assets. Portfolios will, in general, include risky assets. » Return is uncertain or volatile We measure some attributes of assets and portfolios. » Rate of return, or simply return » Expected returns, and » Volatilities of these returns © HB, 2009 Rate of return Return is the reward of investing and is measured in terms of dollars. However, return must be compared with the initial investment. We are really often interested in the rate of return . Rate of return is stated as a percentage. » Often „rate of return‟ is simply called „return‟. Investment Return (ROI) Investment on Return What is Return

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BANK 3004 Portfolio and Fund Management © HB, 2009 Holding Period Return (HPR) The holding period return is the rate of return over a given period. For any security, the rate of return is the payments to the owner plus the change in its value, expressed as a fraction of its purchase price. In symbols, the rate of return over the period t to t+1 is : Value Beginning Component Income Value Beginning - Value Ending return of Rate Assumption that income component is reinvested at the end of the period. t P t C t P - 1 t P HPR Rate of Return: Single Period © HB, 2009 0 1 0 0 1 0 1 0 1 P D P P - P P D P P HPR HPR = Holding Period Return P 0 = Beginning price P 1 = Ending price D 1 = Dividend during period one Capital gain/loss Yield © HB, 2009 Multiple Period Return Arithmetic Mean Return Geometric Mean Return T r r i i Sum of all the returns for T periods Divide by the number of time periods G = [(1 + r 1 ) (1 + r 2 ) … (1 + r T )] 1/T - 1 T-th root Better measure of average (typical) over one period Better measure of growth in wealth over several periods
BANK 3004 Portfolio and Fund Management © HB, 2009 What is Risk Return and Volatility Return is volatile over time. Risk is the extent of volatility or variability of an asset‟s returns over time. More volatility (variability) in returns over time means a more risky investment. © HB, 2009 Risk in finance Risk is the dispersion of possible outcomes due to movements in financial variables. Any deviations from expected value are considered a source of risk. » Both positive and negative deviations (from the expected return) are viewed as sources of risk. Some of the thinking in this slide is developed using Merton & Bodie: 256-7 and “Downside risk”: possibility of losses. “Upside” potential: possibility of gain. © HB, 2009

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Lec%202%20-%20Portfolio%20Risk%20and%20Return - Lecture 2...

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