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MGFB10H3 (19)
Chapter 8

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Sultan Ahmed

Chapter 8: Risk, Returns and Portfolio Theory 8.1 Measuring Returns  Risk: the possibility of incurring harm Ex Post versus Ex Ante Returns  Ex post returns : past or historical returns  Ex ante returns: future or expected returns  Return on investment consists of two components: income yield and capital gain (or loss) yield o Income yield: the return earned in the form of a periodic cash flow received by investors  Cash flows are interest payments from bonds and dividends from equities  CF1= the expected cash flows to be received,0P = the purchase price (or beginning market price)  Yield to maturity is also an expected return  The dividend yield is the cash that investors can expect to earn if the dividend period over the next year are the same as they were over the previous period (not forecast for future) o Dividend yield=current dividend payments/ current value of the index  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 year  Total return= Income Yield + capital gain (or loss) yield  Paper losses: capital losses that people do not accept as losses until they actually sell and realize them o Reinforced by tax rules: capital gains and losses are only taxable on realization  Day trader: someone who buy sand sells based on intraday price movements  Mark to market: carrying securities at the current market value regardless of whether they are sold securities at the current market value regardless of whether they sell them Measuring Average Returns  Arithmetic mean or average: the most commonly used value in statistics; the sum of all returns divided by the total number of observations o Where r=ithe individual returns, n=the total number of observations  Geometric mean: the average or compound growth rate over multiple periods  Standard deviation: a mea
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