FIN 357 Lecture Notes - Lecture 3: Annual Percentage Yield, Effective Interest Rate, Cash Flow

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12 Aug 2019
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Annual percentage yield (apy): apy = (1 + quoted rate/m) m 1. R = stated rate / # of compounding periods. N = # of years * # of compounding periods. Dollar gain = end price + dividend - beginning price. Rate of return = dollar gain / beginning price. The possible variation in cash flow about an expected cash flow. Standard deviation about the expected cash flow. Returns on common stocks tend to be riskier than from investing in a savings account in a bank. Expected rate of return: (probability * expected rate) Standard deviation (sd): [ (expected rate - average rate) 2 (probability)] . Coefficient of variation (cv): a standardized measure of dispersion about the expected value. Shows the risk per unit of return. Asset allocation: diversifying among different kinds of assets. Perfectly positive correlation: diversification has no effect on risk. Perfectly negative correlation: portfolio is perfectly diversified.

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