FIN 4504 Lecture Notes - Lecture 7: Expected Return, Standard Deviation, Capital Gain
22 Sep 2016
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The average of the squared differences from the mean. > rs= the return of a state occurs. > ps= is the probability of a state. > 1/6 x (1-3. 5)2 + 1/6 x (2-3. 5)2 + 1/6 x (3-3. 5)3 + 1/6 x (4-3. 5)2 + 1/6 x (5-3. 5)2 + 1/6 x (6- > easy to understand and calculate if there is a single investment period. > gross return = (2+55)/50 = 1. 14 = 114% > net return = (2+55)/50 1 = 0. 14 = 14% Buy share at ; at end of year it is worth and pays dividend. At the start of the period, some variables are not known, so we can calculate only expected return. Expected" and realized" returns can be and are very different! Current price = , no dividends, time 1 price is as following. Expected return: ( (1/2 x 55 + x 40)/50 ) 1= 10% Realized return state 1: 55/50 1= 10%
