GAR GAR essentially converts HPR to an equivalent effective per period rate Ie

Gar gar essentially converts hpr to an equivalent

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(GAR) GAR essentially converts HPR to an equivalent effective per period rate I.e. the compound annual return FIN2200 Fall 2014 – Lecture 5 5 𝑅𝑅 𝑡𝑡 = 𝐷𝐷 𝑡𝑡 + 𝑃𝑃 𝑡𝑡 − 𝑃𝑃 𝑡𝑡−1 𝑃𝑃 𝑡𝑡−1 = 𝐷𝐷 𝑡𝑡 𝑃𝑃 𝑡𝑡−1 + 𝑃𝑃 𝑡𝑡 − 𝑃𝑃 𝑡𝑡−1 𝑃𝑃 𝑡𝑡−1 1 + 𝐻𝐻𝑃𝑃𝑅𝑅 1 , 𝑇𝑇 = 1 + 𝑅𝑅 1 1 + 𝑅𝑅 2 … (1 + 𝑅𝑅 𝑇𝑇 ) 1 + 𝐺𝐺𝐺𝐺𝑅𝑅 1 , 𝑇𝑇 = (1 + 𝐻𝐻𝑃𝑃𝑅𝑅 1 , 𝑇𝑇 ) 1 𝑇𝑇 = 1 + 𝑅𝑅 1 1 + 𝑅𝑅 2 … (1 + 𝑅𝑅 𝑇𝑇 ) 1 𝑇𝑇
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Returns Example: Self Study Example 1: Calculate total realized returns given the following information a)P0=$50, Div1=$2, P1=$55.50 b)P0=$20, Div1=$0.25, P1=$12.75 c)P0= $30, Div1=$1, Capital Gain=$5 ( d)P0= $130, Div1=$0, Capital Loss=$128 Example 2: Find the holding period return and geometric average rate of return for stocks A and B given the following annual returns a)Yr.1, 12%; Yr.2, 20%; Yr.3, -15%; Yr.4, 6%; Yr.5, -10% b)Yr.1, 100%; Yr.2, 300%, Yr.3, 0%; Yr.4, -50%; Yr.5, -75% FIN2200 Fall 2014 – Lecture 5 6
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Historical Returns and Standard Deviation Mean (average) return is the arithmetic average rate of return in periods 1 to T and is calculated as follows : Where R t is the realized return of a security in year t Sample variance is a measure of the squared deviations from the mean in periods 1 to T and is calculated as follows: Sample standard deviation in periods 1 to T is just the square root of the sample variance: FIN2200 Fall 2014 – Lecture 5 7 ( ) 1 2 1 1 1 = = + + + = T T t t R R R R R T T Var[ R ] = 𝑆𝑆𝐷𝐷 [ 𝑅𝑅 ] = Var[ R ]
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Historical Returns and Standard Deviation: Self Study Example: Consider the returns for the following stocks: Stock A: Yr.1, 12%; Yr.2, 20%; Yr.3, -15%; Yr.4, 6%; Yr.5, -10% Stock B: Yr.1, 100%; Yr.2, 300%, Yr.3, 0%; Yr.4, -50%; Yr.5, -75% a)Find the mean returnsfor stocks A and B b)Find the sample variance and standard deviation for stocks A and B using the information above: Answers: FIN2200 Fall 2014 – Lecture 5 8
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Outline – Risk, Return, and Portfolio Theory 0. Introduction 1. Measures of Risk and Return A. Historical Returns and Standard Deviation B. Returns and Standard Deviation with Risk C. Correlation and Covariance with Risk 2. Portfolio Risk and Return A. Portfolio Measures of Risk and Return i. Portfolio Weights ii. Expected Portfolio Returns iii. Portfolio Variance and Standard Deviation B. Portfolio Diversification i. Diversifiable Versus Non-Diversifiable Risk 3. Choosing Efficient Portfolios (Portfolio Theory) A. Portfolios of Risky Securities i. Mean-Variance Analysis ii. The Markowitz Efficient Frontier B. Risky Securities Plus a Risk-Free Asset i. The Tangent Portfolio ii. (Another) Separation Theorem iii. The Capital Market Line (CML) FIN2200 Fall 2014 – Lecture 5 9
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