This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: where r n is return in each of n subperiods e.g. credit card that charge 3% monthly: APR = 12*3% = 36% EAR = (1 + 3%) 12 – 1 = 42.6% 8 Comparing Rates of Return For risky investments: Holdingperiod return (HPR) = Price increase + dividends Initial price Expected return = E[HPR] Standard deviation = Risk premium = E[HPR] – Riskfree rate = 9 Sharpe Ratio Sharpe ratio = Risk premium Std. dev. first proposed by William Sharpe measures the “riskweighted” excess return = 10 Value at Risk (VaR) ValueatRisk = quantile of the return distribution = measure of loss under extreme market conditions typically 5% quantile (or 5 th percentile) is used Interpretation: the loss on an investment will be larger than the 5% VaR with 5% probability important in risk management systems to limit the maximum loss Example: VaR at Goldman Sachs for daily trading losses was $250m in 2010 (up from $125m in 2007)...
View
Full
Document
This note was uploaded on 12/21/2011 for the course ECON 435 taught by Professor Staff during the Spring '11 term at University of Maryland Baltimore.
 Spring '11
 Staff
 Inflation, Interest Rates

Click to edit the document details