Chapter 8 part 2 my notes Flashcards Preview

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Risk is typically defined as

the possibility of incurring harm


what is ex poste

past or historical returns


what is ex ante

future or expected returns


what does a return on investment consist of

two components 1. income yield 2. capital gain


what is income yield

is the return earned in the form of a periodic cash flow received by the investors - the interest payments from bonds and - the dividends from equities


what is the formula to calculate the income yield

Expected cash flows to be received / the purchase price CF/P


What is the yield to maturity

is the return earned by buying a bond and holding it to maturity - it is also an expected return over that very long investment horizon


What is the dividend yield

the cash that investors can expect to earn if the dividend payments over the next year are the same as they were over the previous period


what is the formula for the dividend yield

current dividend payments / the current value of the index - it is not a forecast of future dividends


what is a capital gain

the appreciation in price of an asset form some starting price, usually the purchase price or the price at the start of the year


what is a capital loss

the depreciation in the price of an asset from some starting price, usually the purchase price or the price at the start of the year


what is the formula for the capital gain (Loss) return or Yield

P1 - P0 / P0 (p I s the selling price or market price)


true of false common shares should gain with inflation (capital gain_ over the long run as their prices and cash flows are not fixed



the yield gap will increase or decrease with inflation



how do you get the complete picture of the return form investing in bonds versus common shares

use the total return equation


what is the total return equation

income yield + capital gain (loss) yield


Estimate the income yield, capital gain (or loss0 yield, and total return for the following securities of over the past year a. a $1,000 par value, 6% bond that was purchased one year ago for $990 and is currently selling for $995 b. A stock that was purchased for $20, provided 4 quarterly dividends of $0.25 each, is currently worth $19.50

CF = 0.6 x $1,000 = $60 P0 = $990 P1 = 995 Income yield = 60/990 =6.06% Capital gain return = (995 -990)/990 = .51% total return = 6.06% + .51% = 6.57% or total return = (60 + 995-990) / 990 = 6.57% b. CF = 0.25x 4 = $1.00 P0 = $20 P1 = 19.50 Income yield = 1/20 = 5% Capital gain (loss) return = (19.50 -20)/20 = -2.5% Total return = 5% - 2.5% = 2.5% or (1+19.50 -20) / 20 = 2.5%


what are paper losses

capital losses that people do not accept as losses until they actually sell and realize them


what is a day trader

someone who buys and sells based on intraday price movements


what is mark to market

carrying securities at the current market value regardless of whether they are sold


how do you measure ex post or historical returns

use arithmetic mean or geometric mean


how do you calculate the arithmetic mean

add them all up and divide by how many (regular average)


how do you calculate the geometric mean

add 1 to each number, multiply all the numbers together, then to the exponent of 1/n, -1


which mean will be less the geometric mean or the arithmetic mean

geometric mean will always be less unless all the values are identical


the more the returns vary, the (bigger or lesser) the difference between the Am and GM will be

bigger the difference b/w the Am and GM


what is standard deviation definition

a measure of risk over all the observations; the square root of the variance


what is standard deviation in other terms

movement away from the mean (avg)


the larger the standard deviation the__________ _________ the return

more variable the return


when the standard deviation is squared, we get a measure called

the variance


the difference b/w Am and GM returns is approximately

half the variance