Risk of Historical Rates of Return

Risk of Historical Rates of Return - 1-1Risk of Historical...

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Unformatted text preview: 1-1Risk of Historical Rates of Returnwhere, σ 2 = the variance of the seriesHPY i = the holding period yield during period iE(HPY) = the expected value of the HPY equal to the arithmetic mean of the series (AM)n = the number of observations•Given a series of historical returns measured by HPY, the risk of returns is measured as: n/HPY)](EHPY[2n1ii2-=∑=σ1-2Determinants of Required Returns•Three Components of Required Return: –The time value of money during the time period–The expected rate of inflation during the period–The risk involved–See Exhibit 1.5•Complications of Estimating Required Return–A wide range of rates is available for alternative investments at any time.1-3Determinants of Required Returns•The Real Risk Free Rate (RRFR) –Assumes no inflation.–Assumes no uncertainty about future cash flows.–Influenced by time preference for consumption of income and investment opportunities in the economy•Nominal Risk-Free Rate (NRFR)–Conditions in the capital market–Expected rate of inflation1-4...
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Risk of Historical Rates of Return - 1-1Risk of Historical...

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