Week four Flashcards
(7 cards)
1
Q
What is the difference between nominal and real interest rates?
A
- Nominal interest rate (R): Growth rate of money.
- Real interest rate (r): Growth rate of purchasing power.
- Fisher Equation: 𝑅 ≈ 𝑟 + 𝑖
where i is the expected inflation rate.
2
Q
What are key properties of a normal distribution?
A
68.26% of returns lie within 1 standard deviation.
95.44% within 2 standard deviations.
99.74% within 3 standard deviations.
2
Q
Why is standard deviation important in investing?
A
It measures the risk (volatility) of an investment.
2
Q
What is a key limitation of Holding period return?
A
It ignores reinvestment risk.
2
Q
What does the Sharpe Ratio measure?
A
SharpeRatio= Risk Premium / Standard Deviation
where risk premium = expected return - risk-free rate.
3
Q
What is shortfall risk?
A
The probability that an investment’s return falls below a minimum acceptable return.
4
Q
A
