FNBU 3221 Chapter Notes - Chapter 12: Risk Premium, Standard Deviation, Frequency Distribution

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16 Apr 2017
Department
Course
Professor
Chapter 12
Returns
Dollar returns
o2 components of ROI: income component & change in value
o
o
o
o
Percentage returns
oUsually more convenient to summarize info about returns in percentage terms instead
of dollar terms
o
o
The Historical Record
A 1st look
oInitially appears that small cap stocks have highest returns since 1925
A closer look
oSmall cap stocks fluctuated most
Average Returns: The First Lesson
Calculating average returns
oAdd up yearly returns & divide by number of years
Average returns: the historical record
oStock returns much larger than bond returns
Risk premiums
oRisk-free return—rate of return on debt that is virtually default risk-free
oRisk premium: excess return required from investment in risky asset over that
required from risk-free investment
1st lesson
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Document Summary

Chapter 12: 2 components of roi: income component & change in value o o o o. Percentage returns: usually more convenient to summarize info about returns in percentage terms instead of dollar terms o o. A 1st look: initially appears that small cap stocks have highest returns since 1925. A closer look: small cap stocks fluctuated most. Calculating average returns: add up yearly returns & divide by number of years. Average returns: the historical record: stock returns much larger than bond returns. Risk premiums: risk-free return rate of return on debt that is virtually default risk-free, risk premium: excess return required from investment in risky asset over that required from risk-free investment. 1st lesson: there is reward for bearing risk. Frequency distributions & variability: variance: average squared difference between actual return & average return, standard deviation: positive square root of variance.

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