Textbook Notes (367,758)
Canada (161,374)
Finance (37)
MGFB10H3 (19)
Derek Chau (11)
Chapter 8

Chapter 8 Notes

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Derek Chau

Chapter 8 Risk, Return, and Portfolio Theory Notes 8.1 Measuring Returns Ex Post versus Ex Ante Returns ex post returns past or historical returns ex ante returns future or expected returns the return on investment consists of 2 components: the income yield and the capital gain (or loss) yield income yield the return earned by investors as a periodic cash flow; CF 1P w0ere CF is 1xpected cash flows to be received capital gain (or loss) the appreciation (or depreciation) in the price of an asset from some starting price, usually the purchase price or the price at the start of the year1 (P 0 P )0 P wher1 P the selling price or current market share total return income yield plus the capital gain (or loss) yield; (CF + P P ) P 1 1 0 0 paper losses capital losses that people do not accept as losses until they actually sell and realize them day trader someone who buys and sells based on intraday price movements mark to market carrying securities at the current market value regardless of whether they are sold Measuring Average Returns arithmetic mean or average the sum of all returns divided by the total number of observations; r in geometric mean the average or compound growth rate over multiple time periods; [(1 + r ) (1 + r )(1 + r )] 11n 1 2 n the geometric mean is always less than the arithmetic mean, unless the values are all identical standard deviation a measure of risk over all the observations; the square root of the variance, denoted as the difference between the AM and GM returns is approximately half the variance the more variable the annual returns, the bigger the difference between the AM and GM measures of return the AM is appropriate when we are trying to estimate the typical return for a given period, such as a year we use the GM when we are interested in determining the true average rate of return over multiple periods Estimating Expected Returns expected returns estimated future returns expected returns are estimated based on historical averages, but the problem is that there is no guarantee the past will repeat itself an alternative approach is
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