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# Chap05 - Chapter 5 Risk and Return Rates of return Expected...

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1 Chapter 5: Risk and Return Chapter 5: Risk and Return Rates of return Expected return and standard deviation Risk and risk premiums Historical return and risk Asset allocation across risky and risk-free portfolios

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2 Chapter 5: Risk and Return You can either sleep well or eat well. -- An old saying on Wall Street
3 Chapter 5: Risk and Return Holding-Period Return Holding period return (HPR) is the rate of return over a given investment period. P1 = Ending price P0 = Beginning price D1 = Dividend during period one 0 0 1 P D P P HPR + - =

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4 Chapter 5: Risk and Return Average Return of Multiple Periods Arithmetic average The sum of returns in each period divided by the number of periods. r =(r 1 + r 2 + r 3 +...+r t ) /t Geometric average The single-per-period return that gives the same cumulative performance as the sequence of actual returns (1+r G ) t = (1+r 1 )*(1+r 2 )*(1+r 3 )*…*(1+r t ) r G = (1+r 1 )*(1+r 2 )*(1+r 3 )*…*(1+r t ) 1/t -1
5 Chapter 5: Risk and Return Average Return of Multiple Periods The arithmetic average return The geometric average return 1 st Year 2 nd Year 3 rd Year 4 th Year Holding period return (%) 10 25 -20 25

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6 Chapter 5: Risk and Return Annual Percentage Rate and Effective Annual Rate Annual percentage rate is the annual rate that is quoted by law
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Chap05 - Chapter 5 Risk and Return Rates of return Expected...

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