ACST101 Lecture Notes - Lecture 9: Covariance, Building Society, Corporations Act 2001
29 Jun 2018
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ACST101 LECTURE 10/5/18
WK9; RISK AND RETURN
FUTURE VALUE VS PRESENT VALUE
- The greater the risk, the larger the return investors require as compensation for
bearing that risk
- Rate of return is what we earn from investment stated in percentage terms
- Higher risk means less certainty
QUANTITATIVE MEASURES OF RETURN
Holding Period Returns
Total holding period return consists of two components
1. Capital appreciation
2. Income
1. Capital appreciation component (RCA) of a return;
2. Income component of a return (R);
Total holding period return is simply;
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Expected Returns
- Expected value represents the sum of products of possible outcomes, and
probabilities that those outcomes will be realised
- Expected return, E(), is an average of possible returns from an investment, where
each of these returns is weighted by the probability that will occur;
VARIANCE AND STANDARD DEVIATION AS MEASURES OF RISK
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find more resources at oneclass.com
Document Summary
The greater the risk, the larger the return investors require as compensation for bearing that risk. Rate of return is what we earn from investment stated in percentage terms. Total holding period return consists of two components: capital appreciation. Income: capital appreciation component (rca) of a return; Expected value represents the sum of products of possible outcomes, and probabilities that those outcomes will be realised. Expected return, e(), is an average of possible returns from an investment, where each of these returns is weighted by the probability that will occur; Variance and standard deviation as measures of risk. The variance (: squares the difference between each possible occurrence and the mean (squaring the differences makes all the numbers positive, multiples each difference by its associated probability before summing them up; If all possible outcomes are equally likely, the formula becomes; Take the square root of the variance to get the standard deviation ( )
