Price and Return Distributions Sum and Product functions

x ‡–—”–›’‡•ǣ
ǡƒ†
Ǥ Š‡…ƒ’‹–ƒŽ
”‡‡Ž‡––‡”•‹‰ƒ†‡‘–‡•–Š‡•—‘ˆ†‹•…”‡–‡
x ”‹–Š‡–‹…ƒ†‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡•Ǥ ˜ƒŽ—‡•ȋˆ”‘–αͳ–‘Ȍ‘ˆ•‘‡˜ƒ”‹ƒ„Ž‡šǣ
x ‘‰‘”ƒŽƒ†‘”ƒŽ†‹•–”‹„—–‹‘•Ǥ ்

x ‡ƒε‡†‹ƒε‘†‡ˆ‘”Ž‘‰‘”ƒŽ†‹•–”‹„—–‹‘•Ǥ ෍ ‫ ݔ‬ൌ ‫ݔ‬ଵ ൅ ‫ݔ‬ଶ ൅ ‫ ڮ‬൅ ‫ ் ݔ‬

x •‡„Ž‡ƒ†–‹‡™‡‹‰Š–‡†ƒ˜‡”ƒ‰‡•Ǥ ௧ୀଵ

x ƒŽ…—Žƒ–‹‘‡šƒ’Ž‡ǣ‡ƒƒ†‡†‹ƒǤ 
x ƒŽ…—Žƒ–‹‘‡šƒ’Ž‡ǣ’”‘„ƒ„‹Ž‹–›‘ˆ’”‹…‡‡š…‡‡†‹‰–Š‡ Š‡…ƒ’‹–ƒŽ
”‡‡Ž‡––‡”’‹†‡‘–‡•–Š‡’”‘†—…–‘ˆ†‹•…”‡–‡
‡ƒƒ†‡†‹ƒǤ ˜ƒŽ—‡•ȋˆ”‘–αͳ–‘Ȍ‘ˆ•‘‡˜ƒ”‹ƒ„Ž‡šǣ
்

ෑ ‫ ݔ‬ൌ ‫ݔ‬ଵ ൈ ‫ݔ‬ଶ ൈ ǥ ൈ ‫ ் ݔ‬

௧ୀଵ

Single Period Returns Geometric and Arithmetic Averages

Gross discrete returnǡ‘ˆ–‡†‡‘–‡†„›…ƒ’‹–ƒŽǣ Arithmetic ƒ˜‡”ƒ‰‡‘˜‡”’‡”‹‘†•ǣ
‫݌‬ଵ σ்௧ୀଵሺ‫ݔ‬௧ିଵ՜௧ ሻ
‫ܴܦܩ‬଴՜ଵ ൌ  ‫ݔ‬ҧ௔௥௜௧௛௠௘௧௜௖௔௩௘௥௔௚௘ǡ଴՜் ൌ 
‫݌‬଴ ܶ
Net discrete returnǡƒŽ•‘…ƒŽŽ‡†–Š‡‡ˆˆ‡…–‹˜‡”‡–—”ሺ‫ݎ‬௘௙௙ ሻ‘” ‫ݔ‬଴՜ଵ ൅ ‫ݔ‬ଵ՜ଶ ൅ ‫ݔ‬ଶ՜ଷ ൅ ‫ ڮ‬൅ ‫ି்ݔ‬ଵ՜்
ൌ 
”‡Žƒ–‹˜‡”‡–—”ǡ‘ˆ–‡†‡‘–‡†„›Ž‘™‡”…ƒ•‡”ǣ ܶ
‫݌‬ଵ ‫݌‬ଵ െ ‫݌‬଴ Geometric ƒ˜‡”ƒ‰‡ ‘˜‡”’‡”‹‘†•ǣ
ܰ‫ܴܦ‬଴՜ଵ ൌ െ ͳ ൌ ൌ ‫ܴܦܩ‬଴՜ଵ െ ͳ
‫݌‬଴ ‫݌‬଴ ଵ
் ்
Log gross discrete returnǡƒŽ•‘…ƒŽŽ‡†–Š‡…‘–‹—‘—•Ž› ‫ݔ‬ҧ௚௘௢௠௘௧௥௜௖௔௩௘௥௔௚௘ǡ଴՜் ൌ ൭ෑሺ‫ݔ‬௧ିଵ՜௧ ሻ൱ 
…‘’‘—†‡†”‡–—”ሺ‫ݎ‬௖௖ ሻ‘”ˆ‘”…‡‘ˆ‹–‡”‡•–ȋ›Ȍǣ ௧ୀଵ
‫݌‬ଵ ଵ
‫ܴܦܩܮ‬଴՜ଵ ൌ Ž ൬ ൰ ൌ Žሺ‫ܴܦܩ‬଴՜ଵ ሻ ൌ ሺ‫ݔ‬଴՜ଵ Ǥ ‫ݔ‬ଵ՜ଶ Ǥ ‫ݔ‬ଶ՜ଷ ǥ ‫ି்ݔ‬ଵ՜் ሻ் 
‫݌‬଴
3 4
Geometric and Arithmetic Average Returns Average Returns – A Curious Example
™‘–›’‡•‘ˆƒ˜‡”ƒ‰‡ȋƒŽ•‘…ƒŽŽ‡†‡ƒȌǣ Time (year) 0 1 2
 Share price ($) ͳͲͲ ͷͲ ͳͲͲ
”‹–Š‡–‹…ƒ˜‡”ƒ‰‡‡–†‹•…”‡–‡”‡–—”ȋȌˆ”‘–‹‡Ͳ–‘݊ǣ Net discrete return pa  ǦͲǤͷ ͳǤͲ
σ௡௜ୀଵሺ‫ݎ‬௜ ሻ ‫ݎ‬ଵ ൅ ‫ݎ‬ଶ ൅ ‫ ڮ‬൅ ‫ݎ‬௡ 
‫ݎ‬ҧ௔௥௜௧௛௠ே஽ோ଴ି௡ ൌ ൌ 
݊ ݊ ‘–‡–Šƒ–™‡™‹ŽŽ‡š’”‡••ƒŽŽ”‡–—”•

ƒ•’—”‡†‡…‹ƒŽ•ǡ‘–Ψǡ—Ž‡••

‡‘‡–”‹…ƒ˜‡”ƒ‰‡‡–†‹•…”‡–‡”‡–—”ȋȌˆ”‘–‹‡Ͳ–‘݊ǣ
ƒ”‡†ƒ••‘Ǥ
‫ݎ‬ҧ௚௘௢௠ே஽ோ଴ି௡ ൌ ሾሺͳ ൅ ‫ݎ‬ଵ ሻሺͳ ൅ ‫ݎ‬ଶ ሻ ǥ ሺͳ ൅ ‫ݎ‬௡ ሻሿଵȀ௡ െ ͳ ‹‹Žƒ”Ž›ˆ‘”•–ƒ†ƒ”††‡˜‹ƒ–‹‘ƒ†
‫݌‬௡ ଵȀ௡ ˜ƒ”‹ƒ…‡Ǥ
ൌ ൬ ൰ െ ͳ
‫݌‬଴

5 6

‫ݎ‬ҧ௚௘௢௠ே஽ோ଴ିଶǡ௣Ǥ௔Ǥ ൌ ሾሺͳ ൅ ‫ݎ‬ଵ ሻሺͳ ൅ ‫ݎ‬ଶ ሻ ǥ ሺͳ ൅ ‫ݎ‬௡ ሻሿଵȀ௡ െ ͳ ˆƒ‹˜‡•–‘”™ƒ–•–‘„—›–Š‡•Šƒ”‡ƒ––‹‡œ‡”‘ƒ†•‡ŽŽ‹–

ൌ ሾሺͳ ൅ ‫ݎ‬଴ିଵ ሻሺͳ ൅ ‫ݎ‬ଵିଶ ሻሿଵȀଶ െ ͳ –™‘›‡ƒ”•Žƒ–‡”ǡ–Š‡–Š‡‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡”‡–—”ƒ‡•
‘”‡•‡•‡•‹…‡‹––ƒ‡•…‘’‘—†‹‰‹–‘ƒ……‘—–‘˜‡”–‹‡Ǥ
ൌ ሾሺͳ ൅ െͲǤͷሻሺͳ ൅ ͳሻሿଵȀଶ െ ͳ
ˆ–Š‡‹˜‡•–‘”™ƒ–•–‘„—›ˆ‘”‘‡›‡ƒ”ƒ†•‡ŽŽƒ›‡ƒ”Žƒ–‡”ǡ
ൌ Ͳ •‘–Š‡”‡ǯ•ƒͳȀʹ’”‘„ƒ„‹Ž‹–›‘ˆŽ‘•‹‰ͷͲΨƒ†ƒͳȀʹ
‫ݎ‬ଵ ൅ ‫ݎ‬ଶ ൅ ‫ ڮ‬൅ ‫ݎ‬௡ ’”‘„ƒ„‹Ž‹–›‘ˆ‰ƒ‹‹‰ͳͲͲΨ–Š‡–Š‡ƒ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡‹•
‫ݎ‬ҧ௔௥௜௧௛௠ே஽ோ଴ିଶǡ௣Ǥ௔Ǥ ൌ 
݊ ƒ”‰—ƒ„Ž›„‡––‡”Ǥ
‫ݎ‬଴ିଵ ൅ ‫ݎ‬ଵିଶ
ൌ  
ʹ
െͲǤͷ ൅ ͳ
ൌ
ʹ
ൌ ͲǤʹͷ
Š‹…Šƒ˜‡”ƒ‰‡”‡–—”–‡ŽŽ•–Š‡–”—‡•–‘”›ǫ
‡‘‡–”‹…ƒ˜‡”ƒ‰‡•ƒ”‡‘ˆ–‡—•‡†‹–Š‡†‡„–ƒ”‡–•ˆ‘”
 
ȌǤ
ˆ‹ƒ…‡™‡ˆ”‡“—‡–Ž›—•‡„‘–Š–›’‡•‘ˆƒ˜‡”ƒ‰‡•Ǥ
 x ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡”‡–—”•ƒ”‡‘ˆ–‡—•‡†‹ƒ”‘™‹–œ
‡ƒǦ˜ƒ”‹ƒ…‡’‘”–ˆ‘Ž‹‘ƒƒŽ›•‹•–‘ˆ‹†•–‘…•ǯƒ˜‡”ƒ‰‡
”‡–—”•ˆ”‘’ƒ•–†ƒ–ƒǤ
x
…‘’—–‹‰–Š‡–‡”•–”—…–—”‡‘ˆ‹–‡”‡•–”ƒ–‡•Ǥ‘–‹…‡–Šƒ–
–Š‡“—ƒ–‹–›ሺͳ ൅ ‫Ͳݎ‬՜ͳ݂݂݁ ሻ‹•–Š‡‰”‘••†‹•…”‡–‡”‡–—”ȋ
7 8
Term Structure of Interest Rates: The Prices are Log-Normally Distributed
Expectations Hypothesis ‹…‡•‡…—”‹–›’”‹…‡•ȋ’Ȍ…ƒ‘–ˆƒŽŽ„‡Ž‘™œ‡”‘†—‡–‘Ž‹‹–‡†
Ž‹ƒ„‹Ž‹–›ǡ–Š‡›̵”‡‘”ƒŽŽ›ƒ••—‡†–‘„‡Ž‘‰Ǧ‘”ƒŽŽ›
š’‡…–ƒ–‹‘•Š›’‘–Š‡•‹•‹•–Šƒ–Ž‘‰–‡”•’‘–”ƒ–‡•ȋ’Ž—•‘‡Ȍ
†‹•–”‹„—–‡†™‹–ŠƒŽ‡ˆ–Ǧ‘•–˜ƒŽ—‡‘ˆœ‡”‘Ǥ
ƒ”‡–Š‡‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡•Š‘”–‡”–‡”•’‘–ƒ†
ˆ‘”™ƒ”†”ƒ–‡•ȋ’Ž—•‘‡Ȍ‘˜‡”–Š‡•ƒ‡–‹‡’‡”‹‘†Ǥ ‫݌‬௧ ̱݈݊ܰሺ݉݁ܽ݊ǡ ‫݁ܿ݊ܽ݅ݎܽݒ‬ሻ
ƒ–Š‡ƒ–‹…ƒŽŽ›ǣ Ͳ ൑ ‫݌‬௧ ൏ λ
ଵ
் ˆ…‘—”•‡ǡ‹”‡ƒŽ‹–›–Š‹•ƒ••—’–‹‘‘ˆŽ‘‰Ǧ‘”ƒŽ’”‹…‡•ȋƒ†
ͳ ൅ ‫ݎ‬଴՜் ൌ ቀሺͳ ൅ ‫ݎ‬଴՜ଵ ሻሺͳ ൅ ‫ݎ‬ଵ՜ଶ ሻሺͳ ൅ ‫ݎ‬ଶ՜ଷ ሻǤ Ǥ Ǥ ൫ͳ ൅ ‫ݎ‬ሺ்ିଵሻ՜் ൯ቁ 
‘”ƒŽ…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”•Ȍ‹•„”‘‡ǡ„—–
‘” ‡‡’‹‰‹–ƒ‡•–Š‡ƒ–Š‡ƒ–‹…•–”ƒ…–ƒ„Ž‡Ǥ
ሺͳ ൅ ‫ݎ‬଴՜் ሻ் ൌ ሺͳ ൅ ‫ݎ‬଴՜ଵ ሻሺͳ ൅ ‫ݎ‬ଵ՜ଶ ሻሺͳ ൅ ‫ݎ‬ଶ՜ଷ ሻ ǥ ሺͳ ൅ ‫ݎ‬ሺ்ିଵሻ՜் ሻ
Š‡”‡‹•–Š‡—„‡”‘ˆ’‡”‹‘†•ƒ†ƒŽŽ”ƒ–‡•ƒ”‡effective
”ƒ–‡•‘˜‡”‡ƒ…Š’‡”‹‘†Ǥ
9 10

GDR's are Log-Normally distributed NDR's are Log-Normally distributed

‹…‡‰”‘••†‹•…”‡–‡”‡–—”•ȋ
̵•Ȍƒ”‡Ž‹‡ƒ”ˆ—…–‹‘•‘ˆ–Š‡ ‡–†‹•…”‡–‡”‡–—”•ȋ̵•ǡƒŽ•‘‘™ƒ•‡ˆˆ‡…–‹˜‡”‡–—”•Ȍ
’”‹…‡ǡ–Š‡›ƒ”‡ƒŽ•‘Ž‘‰Ǧ‘”ƒŽŽ›†‹•–”‹„—–‡†Ǥ ƒ”‡‡“—ƒŽ–‘
ǯ•‹—•ͳǡ•‘–Š‡›ǯ”‡•Š‹ˆ–‡†–‘–Š‡Ž‡ˆ–„›‘‡Ǥ

̵•Šƒ˜‡ƒŽ‡ˆ–Ǧ‘•–’‘‹–‘ˆœ‡”‘ǡ•ƒ‡ƒ•’”‹…‡•Ǥ ǯ•Šƒ˜‡ƒŽ‡ˆ–Ǧ‘•–’‘‹–‘ˆ‡‰ƒ–‹˜‡‘‡Ǥ
‫݈̱ܴܰ݊ܦܩ‬ሺ݉݁ܽ݊ǡ ‫݁ܿ݊ܽ݅ݎܽݒ‬ሻ ܰ‫݈̱ܴܰ݊ܦ‬ሺ݉݁ܽ݊ǡ ‫݁ܿ݊ܽ݅ݎܽݒ‬ሻ
Ͳ ൑ ‫ܴܦܩ‬௧՜௧ାଵ ൏ λ െͳ ൑ ܰ‫ܴܦ‬௧՜௧ାଵ ൏ λ

 

11 12
LGDR's are Normally distributed AAGDR = Mean GDR
௣
‘‰‰”‘••†‹•…”‡–‡”‡–—”•ቀ‫ ܴܦܩܮ‬ൌ Ž ቀ ೟ ቁቁƒ”‡‘”ƒŽŽ› ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡‰”‘••†‹•…”‡–‡”‡–—”•ȋ
Ȍ‹•
௣బ
–Š‡‡ƒǣ
†‹•–”‹„—–‡†ƒ†–Š‡›ƒ”‡—„‘—†‡†‹–Š‡’‘•‹–‹˜‡ƒ†
்
‡‰ƒ–‹˜‡†‹”‡…–‹‘•Ǥ ͳ ‫݌‬௧
‫ܴܦܩܣܣ‬଴՜் ൌ Ǥ෍൬ ൰
‫̱ܴܰܦܩܮ‬ሺ݉݁ܽ݊ǡ ‫݁ܿ݊ܽ݅ݎܽݒ‬ሻ ܶ ‫݌‬௧ିଵ
௧ୀଵ

െλ ൑ ‫ܴܦܩܮ‬௧՜௧ାଵ ൏ λ ‫݌‬ଵ ‫݌‬ଶ ‫݌‬

൅ ൅ ‫ڮ‬൅ ்
‫݌‬ ‫݌‬ଵ ‫ି்݌‬ଵ
ൌ ଴ 
ܶ
‫ܴܦܩ‬଴՜ଵ ൅ ‫ܴܦܩ‬ଵ՜ଶ ൅ ‫ ڮ‬൅ ‫ି்ܴܦܩ‬ଵ՜்
ൌ 
ܶ


13 14

GAGDR = Median GDR LGAGDR = AALGDR = Mean, Median and

‡‘‡–”‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡‰”‘••†‹•…”‡–‡”‡–—”•ȋ

Ȍǣ Mode LGDR
ଵ
் ் Š‡Ž‘‰‘ˆ–Š‡‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡‰”‘••†‹•…”‡–‡”‡–—”•
‫݌‬௧ ȋ

Ȍ‹•ǣ
‫ܴܦܩܣܩ‬଴՜் ൌ ൭ෑ ൬ ൰൱ 
‫݌‬௧ିଵ ଵ
௧ୀଵ
் ்
ଵ ‫݌‬௧
ൌ ሺ‫ܴܦܩ‬଴՜ଵ ൈ ‫ܴܦܩ‬ଵ՜ଶ ൈ ǥ ൈ ‫ି்ܴܦܩ‬ଵ՜் ሻ்  ‫ܴܦܩܣܩܮ‬଴՜் ൌ Ž ൮൭ෑ ൬ ൰൱ ൲
‫݌‬௧ିଵ
ଵ ௧ୀଵ
‫݌‬ଵ ‫݌‬ଶ ‫݌‬ଷ ‫் ்݌‬
ൌ ൬ ൈ ൈ ൈ ǥൈ ൰  ͳ ‫்݌‬ ͳ
‫݌‬଴ ‫݌‬ଵ ‫݌‬ଶ ‫ି்݌‬ଵ ൌ Ǥ Ž ൬ ൰ ൌ Ǥ Žሺ‫ܴܦܩ‬଴՜் ሻ
ଵ ܶ ‫݌‬଴ ܶ
‫் ்݌‬ ଵ
ൌ ൬ ൰ ൌ ሺ‫ܴܦܩ‬଴՜் ሻ் 
‫݌‬଴

15 16
Š‡Ž‘‰‘ˆ–Š‡‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡‰”‘••†‹•…”‡–‡”‡–—”•
ȋ

Ȍ‡“—ƒŽ•–Š‡ƒ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡‘ˆ–Š‡Ž‘‰‰”‘••†‹•…”‡–‡
”‡–—”•ȋ
Ȍǣ
ଵ
் ்
‫݌‬௧
‫ܴܦܩܣܩܮ‬଴՜் ൌ Ž ൮൭ෑ ൬ ൰൱ ൲
‫݌‬௧ିଵ
௧ୀଵ

ͳ ‫݌‬ଵ ‫݌‬ଶ ‫݌‬ଷ ‫்݌‬

ൌ Ǥ Ž ൬ ൈ ൈ ൈ ǥ ൈ ൰
ܶ ‫݌‬଴ ‫݌‬ଵ ‫݌‬ଶ ‫ି்݌‬ଵ
ͳ ‫݌‬ଵ ‫݌‬ଶ ‫݌‬ଷ ‫்݌‬
ൌ Ǥ ൬Ž ൬ ൰ ൅ Ž ൬ ൰ ൅ Ž ൬ ൰ ൅ ‫ ڮ‬൅ Ž ൬ ൰൰
ܶ ‫݌‬଴ ‫݌‬ଵ ‫݌‬ଶ ‫ି்݌‬ଵ
்
ͳ ‫݌‬௧
ൌ Ǥ ෍ ൬Ž ൬ ൰൰  ൌ ‫ܴܦܩܮܣܣ‬଴՜் 
ܶ ‫݌‬௧ିଵ
௧ୀଵ
17 18

SDLGDR Š‡geometric•–ƒ†ƒ”††‡˜‹ƒ–‹‘‘ˆ–Š‡‰”‘••†‹•…”‡–‡
”‡–—”•‹•†‡ˆ‹‡†ƒ•–Š‡‡š’‘‡–‹ƒŽ‘ˆ–Š‡arithmetic
Š‡arithmetic•–ƒ†ƒ”††‡˜‹ƒ–‹‘‘ˆ–Š‡Ž‘‰‰”‘••†‹•…”‡–‡ •–ƒ†ƒ”††‡˜‹ƒ–‹‘‘ˆ–Š‡log‰”‘••†‹•…”‡–‡”‡–—”•ȋ
ȌǤ
”‡–—”•ȋ
Ȍ‹•†‡ˆ‹‡†ƒ•ǣ

‡‘‡–”‹…
 ൌ ‡š’ሺ
ሻ
் ଶ
ͳ ‫݌‬௧ ଶ ଵ ீ஽ோ೟షభ՜೟
ܵ‫ ܴܦܩܮܦ‬ൌ ߪ ൌ ඩ Ǥ ෍ ቆ൬Ž ൬ ൰ െ ‫ܴܦܩܮܣܣ‬଴՜் ൰ ቇ ൌ ‡š’ ቆට Ǥ σ்௧ୀଵ ൬ቀ݈݊ ቀ ቁቁ ൰ቇ
் ீ஺ீ஽ோబ՜೅
ܶ ‫݌‬௧ିଵ
௧ୀଵ

‹…‡‫ܴܦܩܮܣܣ‬଴՜் ൌ ‫ܴܦܩܣܩܮ‬଴՜் ൌ Žሺ‫ܴܦܩܣܩ‬଴՜் ሻǡ–Š‡ǣ

்
ͳ ‫ܴܦܩ‬௧ିଵ՜௧ ଶ
ܵ‫ ܴܦܩܮܦ‬ൌ ඩ Ǥ ෍ ቆ൬Ž ൬ ൰൰ ቇ
ܶ ‫ܴܦܩܣܩ‬଴՜்
௧ୀଵ

19 20
AAGDR = exp(AALGDR + SDLGDR2/2)
‘–Š‡”‹–‡”‡•–‹‰”‡Žƒ–‹‘•Š‹’„‡–™‡‡–Š‡ƒ”‹–Š‡–‹…
ƒ˜‡”ƒ‰‡‰”‘••†‹•…”‡–‡”‡–—”ȋ
Ȍƒ†–Š‡ƒ”‹–Š‡–‹…
ƒ˜‡”ƒ‰‡‘ˆ–Š‡Ž‘‰‰”‘••†‹•…”‡–‡”‡–—”ȋ
‘”
…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”ȌǤ
ௌ஽௅ீ஽ோ మ
‫ ܴܦܩܣܣ‬ൌ ݁ ஺஺௅ீ஽ோା ଶ 
ܵ‫ܴܦܩܮܦ‬ଶ
ൌ ‡š’ሺ‫ܴܦܩܣܩܮ‬ሻ ൈ ‡š’ ቆ ቇ
ʹ
ܵ‫ܴܦܩܮܦ‬ଶ
ൌ ‫ ܴܦܩܣܩ‬ൈ ‡š’ ቆ ቇ
ʹ
 

21 22

‘‡’‡‘’Ž‡’”‡ˆ‡”–‘™”‹–‡–Š‡‡š’”‡••‹‘™‹–Š‘—––Š‡ ‡…‡••ƒ”›ƒ••—’–‹‘•ǣ
‡š’‘‡–‹ƒŽˆ—…–‹‘„›–ƒ‹‰–Š‡Ž‘‰ƒ”‹–Š‘ˆ„‘–Š•‹†‡•ǣ x 
̵•ȋƒŽ•‘…ƒŽŽ‡†…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”•Ȍ
ௌ஽௅ீ஽ோ మ —•–„‡‘”ƒŽŽ›†‹•–”‹„—–‡†ƒ†–Š‡”‡ˆ‘”‡–Š‡
ǯ•ƒ”‡
‫ ܴܦܩܣܣ‬ൌ ݁ ஺஺௅ீ஽ோା ଶ 
Ž‘‰Ǧ‘”ƒŽŽ›†‹•–”‹„—–‡†Ǥ
ܵ‫ܴܦܩܮܦ‬ଶ x ˆ–Š‡”‡–—”•ȋ
̵•Ȍƒ”‡‘ˆƒ’‘”–ˆ‘Ž‹‘ǡ–Š‹•‡“—ƒ–‹‘‘Ž›
‫ ܴܦܩܣܣܮ‬ൌ ‫ ܴܦܩܮܣܣ‬൅ 
ʹ Š‘Ž†•‹ˆ–Š‡™‡‹‰Š–•ƒ”‡…‘–‹—‘—•Ž›”‡„ƒŽƒ…‡†Ǥ
Š‡”‡‹•ƒ†‹ˆˆ‡”‡…‡„‡–™‡‡Š‘™–Š‡
ƒ†

ƒ”‡…ƒŽ…—Žƒ–‡†ˆ”‘’”‹…‡•ǣ
்
ͳ ‫݌‬௧
‫ ܴܦܩܣܣܮ‬ൌ Ž ൭ Ǥ ෍ ൬ ൰൱
ܶ ‫݌‬௧ିଵ
௧ୀଵ
்
ͳ ‫݌‬௧
‫ ܴܦܩܮܣܣ‬ൌ Ǥ ෍ ൭Ž ൬ ൰൱ ൌ ‫ܴܦܩܣܩܮ‬
ܶ ‫݌‬௧ିଵ
௧ୀଵ
23 24
Mean GDR ≥ Median GDR
ܵ‫ܴܦܩܮܦ‬ଶ
‫ ܴܦܩܣܣ‬ൌ ‫ ܴܦܩܣܩ‬ൈ ‡š’ ቆ ቇ
ʹ Image g author:
O
Olivie
Oli
Ol livieer ddee La
Olivier La
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Gr rrandville, from
Grandville,
Š‹•‹•‡“—‹˜ƒŽ‡––‘ǣ hii bo
his book
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Pri
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ଶ Portfolio
‡ƒ
 ൌ ‡†‹ƒ
 ൈ ‡š’ ቆ ቇ Analysis’, 2001.
ʹ
‘–Š‡‡ƒ
ȋ‘”
Ȍ‹•ƒŽ™ƒ›•‰”‡ƒ–‡”–Šƒ‘”‡“—ƒŽ
ୗୈ୐ୋୈୖమ
–‘–Š‡‡†‹ƒ
ȋ‘”

Ȍ„‡…ƒ—•‡‡š’ ቀ ቁ‹•
ଶ
ƒŽ™ƒ›•‰”‡ƒ–‡”–Šƒ‘”‡“—ƒŽ–‘‘‡Ǥ
‫ܖ܉܍ۻ‬۵۲‫ ܀‬൒ ‫ܖ܉ܑ܌܍ۻ‬۵۲‫ۯۯ”‘܀‬۵۲‫ ܀‬൒ ۵‫ۯ‬۵۲‫܀‬
Š‹•…ƒ„‡•Š‘™‹–—‹–‹˜‡Ž›—•‹‰ƒ‰”ƒ’ŠǤ
25  26

Why is this interesting? Mean versus Median of a Log-normally

ˆˆ—–—”‡’”‹…‡•ƒ”‡Ž‘‰Ǧ‘”ƒŽŽ›†‹•–”‹„—–‡†ǡ–Š‡‡ƒƒ† distributed variable
‡†‹ƒˆ—–—”‡’”‹…‡•™‹ŽŽ„‡†‹ˆˆ‡”‡–Ǩ —‡–‘–Š‡Ž‘‰”‹‰Š––ƒ‹Ž‹–Š‡Ž‘‰Ǧ‘”ƒŽ†‹•–”‹„—–‹‘ǡ–Š‡”‡ƒ”‡
൬஺஺௅ீ஽ோା
ୗୈ୐ୋୈୖమ
൰Ǥ௧ •‘‡˜‡”›Š‹‰Š˜ƒŽ—‡•™Š‹…Š‹…”‡ƒ•‡–Š‡‡ƒ„—–Šƒ˜‡Ž‡••‡ˆˆ‡…–
‫ܲ݊ܽ݁ܯ‬௧ ൌ ܲ଴ Ǥ݁ ଶ ൌ ܲ଴ Ǥ ‫ܴܦࡳܣܣ‬௧ ‘–Š‡‡†‹ƒǤ
ൌ ܲ଴ Ǥ ሺͳ ൅ ‫ܴܦࡺܣܣ‬ሻ௧ 
The chance of achieving a GDR, NDR or price above the mean is
 less than 50%.
ௌ஽௅ீ஽ோ మ Š‡…Šƒ…‡‘ˆ
‫ܲ݊ܽ݅݀݁ܯ‬௧ ൌ ܲ଴ Ǥ ݁ ஺஺௅ீ஽ோǤ௧ ൌ ܲ଴ Ǥ ‫ܴܦࡳܣܣ‬௧ Ǥ ݁ ି ଶ Ǥ௧
ƒ…Š‹‡˜‹‰ƒ”‡–—”
ܵ‫ܴܦܩܮܦ‬ଶ Ǥ ‫ݐ‬ ƒ„‘˜‡–Š‡‡†‹ƒ
ൌ ܲ଴ Ǥ ሺͳ ൅ ‫ܴܦࡺܣܣ‬ሻ௧ Ȁ ‡š’ ቆ ቇ
ʹ ‹•‡šƒ…–Ž›ͷͲΨ
•‹…‡–Š‡‡†‹ƒ‹•
–Š‡ͷͲ–Š’‡”…‡–‹Ž‡Ǥ
27 28
Time Weighted Average = GAGDR = Median Ensemble Average = AAGDR = Mean GDR
GDR ˜‡”–‹‡ǡ–Š‡…Šƒ…‡‘ˆƒ…Š‹‡˜‹‰‘”‡š…‡‡†‹‰–Š‡mean
’”‹…‡ǡ
‘”™‹ŽŽ‰‡–•ƒŽŽ‡”ƒ†•ƒŽŽ‡”Ǥ•–‹‡
Š‡Ǯ–‹‡Ǧ™‡‹‰Š–‡†ƒ˜‡”ƒ‰‡ǯ
‘”‹••›‘›‘—•™‹–Š
ƒ’’”‘ƒ…Š‡•‹ˆ‹‹–›ǡ–Š‡…Šƒ…‡™‹ŽŽƒ’’”‘ƒ…Šœ‡”‘Ǥ
–Š‡‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡
‘”Ǥ
Š‹•ƒ‡••‡•‡„‡…ƒ—•‡–Š‡”‡ƒ”‡ƒ•ƒŽŽ—„‡”‘ˆ•Šƒ”‡•
˜‡”–‹‡ǡ–Š‡…Šƒ…‡‘ˆƒ…Š‹‡˜‹‰‘”‡š…‡‡†‹‰–Š‡‡†‹ƒ
–Šƒ–™‹ŽŽ†‘‡š…‡’–‹‘ƒŽŽ›™‡ŽŽǤŠ‹‘ˆ‡”•Š‹”‡ƒ–Šƒ™ƒ›ǡ
’”‹…‡ǡ
‘”™‹ŽŽƒŽ™ƒ›•„‡ͷͲΨǤ

‘‘‰Ž‡‘”ƒœ‘™Š‹…ŠŠƒ˜‡Šƒ†‹…”‡†‹„Ž›Š‹‰Š”‡–—”•Ǥ
  Š‡”‡‹•‘Ž‹‹––‘Š‘™Š‹‰Š’”‹…‡•ǡ
ǯ•‘”ǯ•…ƒ‰‘Ǥ
‘™‡˜‡”ǡ–Š‡Ž‘™‡•––Šƒ–’”‹…‡•ƒ†
ǯ•…ƒ‰‘‹•œ‡”‘ƒ†
ǯ•…ƒǯ–‰‡–„‡Ž‘™‹—•ͳ™Š‹…Š‹•Ž‘•‹‰ͳͲͲΨǤ

29 30

Š‡ƒ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡‹•’—ŽŽ‡†—’„›–Š‡•ƒŽŽ—„‡”‘ˆ Calculation Example: Mean and Median

˜‡”›Š‹‰Š”‡–—”•ǡ™Š‹Ž‡–Š‡‡†‹ƒ‘”‰‡‘‡–”‹…ƒ˜‡”ƒ‰‡ǡ–Š‡
Ǯ‹††Ž‡˜ƒŽ—‡ǯǡ‹•‘–ƒˆˆ‡…–‡†ƒ•—…ŠǤ Prices
 Question 1: •–‘…Šƒ•ƒƒ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡…‘–‹—‘—•Ž›
…‘’‘—†‡†”‡–—”ȋ
Ȍ‘ˆ10Ψ’ƒǡƒ•–ƒ†ƒ”†
†‡˜‹ƒ–‹‘‘ˆ…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”•ȋ
Ȍ‘ˆ
16.45Ψ’ƒƒ†…—””‡–•–‘…’”‹…‡‘ˆ̈́1Ǥ
20›‡ƒ”•ǡ™Šƒ–†‘›‘—‡š’‡…–‹–•meanƒ†median’”‹…‡•
–‘„‡ǫ
••—‡–Šƒ–•–‘…’”‹…‡•ƒ”‡Ž‘‰Ǧ‘”ƒŽŽ›†‹•–”‹„—–‡†Ǥ

31 32
Answer:Š‡‡†‹ƒ’”‹…‡…ƒ„‡ˆ‘—†™‹–Š–Š‡ˆ‘”—ŽƒǤ Calculation Example: Probabilities
‫ܲ݊ܽ݅݀݁ܯ‬௧ ൌ ܲ଴ Ǥ ݁ ஺஺௅ீ஽ோǤ௧
 Question 2: •–‘…Šƒ•ƒƒ”‹–Š‡–‹…ƒ˜‡”ƒ‰‡…‘–‹—‘—•Ž›
଴Ǥଵൈଶ଴
‫ܲ݊ܽ݅݀݁ܯ‬ଶ଴ ൌ ͳ ൈ ݁ ൌ ͹Ǥ͵ͺͻͲͷ͸Ͳͻͻ …‘’‘—†‡†”‡–—”ȋ
Ȍ‘ˆ10Ψ’ƒǡƒ•–ƒ†ƒ”†
Š‡‡ƒ’”‹…‡‹•ƒŽ‹––Ž‡Šƒ”†‡”Ǥ †‡˜‹ƒ–‹‘‘ˆ…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”•ȋ
Ȍ‘ˆ
ୗୈ୐ୋୈୖమ
46.52Ψ’ƒƒ†…—””‡–•–‘…’”‹…‡‘ˆ̈́1Ǥ
൬஺஺௅ீ஽ோା ൰Ǥ௧
‫ܲ݊ܽ݁ܯ‬௧ ൌ ܲ଴ Ǥ݁ ଶ  50›‡ƒ”•ǡ™Šƒ–†‘›‘—‡š’‡…–‹–•meanƒ†median’”‹…‡•
൬଴Ǥଵା
଴Ǥଵ଺ସହమ
൰ൈଶ଴
–‘„‡ǫ
‫ܲ݊ܽ݁ܯ‬ଶ଴ ൌ ͳ ൈ ݁ ଶ ൌ ͻǤ͸ͺͷʹ͵ͶͶͳ
••—‡–Šƒ–•–‘…’”‹…‡•ƒ”‡Ž‘‰Ǧ‘”ƒŽŽ›†‹•–”‹„—–‡†Ǥ
 
Answer:Š‡‡†‹ƒ’”‹…‡…ƒ„‡ˆ‘—†™‹–Š–Š‡ˆ‘”—ŽƒǤ
‫ܲ݊ܽ݅݀݁ܯ‬௧ ൌ ܲ଴ Ǥ ݁ ஺஺௅ீ஽ோǤ௧ 
‫ܲ݊ܽ݅݀݁ܯ‬ହ଴ ൌ ͳ ൈ ݁ ଴Ǥଵൈହ଴ ൌ ͳͶͺǤͶͳ

33 34

Š‡‡ƒ’”‹…‡‹•ƒŽ‹––Ž‡Šƒ”†‡”Ǥ Question 2: Šƒ–‹•–Š‡’”‘„ƒ„‹Ž‹–›‘ˆ–Š‡•Šƒ”‡’”‹…‡

ୗୈ୐ୋୈୖమ ‡š…‡‡†‹‰–Š‡median’”‹…‡‘ˆ̈́ͳͶͺǤͶͳ‹ͷͲ›‡ƒ”•ǫ
൬஺஺௅ீ஽ோା ൰Ǥ௧
‫ܲ݊ܽ݁ܯ‬௧ ൌ ܲ଴ Ǥ ݁ ଶ  Answer: Š‡‡†‹ƒ’”‹…‡‹•–Š‡Ǯ‹††Ž‡’”‹…‡ǯ™Š‡ƒŽŽ
଴Ǥସ଺ହଶమ ’‘••‹„Ž‡’”‹…‡•ƒ”‡ƒ””ƒ‰‡†ˆ”‘•ƒŽŽ‡•––‘„‹‰‰‡•–Ǥ‘–Š‡
൬଴Ǥଵା ൰ൈହ଴
‫ܲ݊ܽ݁ܯ‬ହ଴ ൌ ͳ ൈ ݁ ଶ ൌ ͵͵ͳͻͻǤͲ͵
…Šƒ…‡‘ˆƒ…Š‹‡˜‹‰ƒ’”‹…‡Š‹‰Š‡”–Šƒ–Š‡‡†‹ƒ‹•ƒŽ™ƒ›•
Š‡‡ƒ‹•ƒŽ‘–„‹‰‰‡”–Šƒ–Š‡‡†‹ƒǤ ͷͲΨǤ
Question 3: Šƒ–‹•–Š‡’”‘„ƒ„‹Ž‹–›‘ˆ–Š‡•Šƒ”‡’”‹…‡
‡š…‡‡†‹‰–Š‡mean’”‹…‡‘ˆ̈́͵͵ǡͳͻͻǤͲ͵‹ͷͲ›‡ƒ”•ǫ‘–‡–Šƒ–
–Š‡‡ƒ‹•–Š‡ƒ”‹–Š‡–‹…‡ƒǤ
Answer: Š‡…Šƒ…‡‘ˆƒ…Š‹‡˜‹‰ƒ’”‹…‡‘”‡–Šƒ–Š‡‡ƒ
™‹ŽŽ„‡Ž‡••–ŠƒͷͲΨǤ

35 36
‘ˆ‹†–Š‡‡šƒ…–’”‘„ƒ„‹Ž‹–›ǡ…‘˜‡”––Š‡log-normally ›•–ƒ†ƒ”†‹•‹‰–Š‡•‡…‘–‹—‘—•Ž›…‘’‘—†‡†”‡–—”•‹–‘
†‹•–”‹„—–‡†’”‹…‡•‹–‘normally†‹•–”‹„—–‡†…‘–‹—‘—•Ž› •…‘”‡•™‡…ƒ–Š‡ˆ‹†–Š‡’”‘„ƒ„‹Ž‹–›‘ˆ‡š…‡‡†‹‰–Š‡
…‘’‘—†‡†”‡–—”•ȋ
ǯ•ȌǤ ‡ƒ’”‹…‡Ǥ
‫ܲ݊ܽ݁ܯ‬ହ଴ ‫ݔ‬െߤ
‫ܴܦܩܣܣܮ‬ହ଴௬௥ ൌ Ž ൬ ൰ ܼൌ 
ܲ଴ ߪ
͵͵ͳͻͻǤͲ͵ Žሺ‫ܲ݊ܽ݁ܯ‬ହ଴ Ȁͳሻ െ Žሺ‡†‹ƒହ଴ Ȁͳሻ
ൌ Ž ൬ ൰ ൌ ͳͲǤͶͳͲʹ͹͸ ൎ ͳͲͶͳΨ ൌ 
ͳ ܵ‫ ܴܦܩܮܦ‬ൈ ξͷͲ
‫ܴܦܩܮܣܣ‬ହ଴௬௥ ൌ ‫ܴܦܩܮܣܣ‬ଵ௬௥ ൈ ͷͲ ൌ ͲǤͳ ൈ ͷͲ ൌ ͷ ൎ ͷͲͲΨ ͳͲǤͶͳͲʹ͹͸ െ ͷ
ൌ ൌ ͳǤ͸ͶͶ͹͵Ͳ͵͹͵
͵ǤʹͺͻͶ͸Ͳ͹Ͷ͸
ܵ‫ܴܦܩܮܦ‬ହ଴௬௥ ൌ ܵ‫ܴܦܩܮܦ‬ଵ௬௥ ൈ ξͷͲ ൌ ͲǤͶ͸ͷʹ ൈ ξͷͲ
ൌ ͵ǤʹͺͻͶ͸Ͳ͹Ͷ͸ ൎ ͵ʹͻΨ ܲ‫ܾ݋ݎ‬ሺܲହ଴ ൏ ‫ܲ݊ܽ݁ܯ‬ହ଴ ሻ ൌ ܰሺͳǤ͸ͶͶ͹͵ሻ ൌ ͲǤͻͷ ൌ ͻͷΨ

‘–‡–Šƒ––Š‡•‡”‡–—”•ƒ†–Š‡•–ƒ†ƒ”††‡˜‹ƒ–‹‘ƒ”‡ƒŽŽ ܲ‫ܾ݋ݎ‬ሺܲହ଴ ൐ ‫ܲ݊ܽ݁ܯ‬ହ଴ ሻ ൌ ͳ െ ܲ‫ܾ݋ݎ‬ሺܲହ଴ ൏ ‫ܲ݊ܽ݁ܯ‬ହ଴ ሻ

‡ƒ•—”‡†‘˜‡”–Š‡ͷͲ›‡ƒ”’‡”‹‘†ǡ–Š‡›ǯ”‡‘–’‡”ƒ—Ǥ ൌ ͳ െ ܰሺͳǤ͸ͶͶ͹͵ሻ ൌ ͳ െ ͲǤͻͷ ൌ ͷΨ

37 38

Š‡”‡ˆ‘”‡–Š‡”‡ǯ•‘Ž›ƒͷΨ…Šƒ…‡‘ˆ–Š‡•–‘…’”‹…‡
‡š…‡‡†‹‰–Š‡‡ƒ‡š’‡…–‡†ˆ—–—”‡’”‹…‡‘ˆ̈́͵͵ǡͳͻͻǤͲ͵‹ͷͲ
›‡ƒ”•Ǩ
‘™‡˜‡”ǡ–Š‡”‡ǯ•ƒͷͲΨ…Šƒ…‡‘ˆ–Š‡•–‘…’”‹…‡‡š…‡‡†‹‰
–Š‡‡†‹ƒ‡š’‡…–‡†ˆ—–—”‡’”‹…‡‘ˆ̈́ͳͶͺǤͶͳ‹ͷͲ›‡ƒ”•Ǥ
•›‘—…ƒ•‡‡ǡ–Š‡Ž‘‰‡”–Š‡–‹‡ǡ–Š‡Žƒ”‰‡”–Š‡†‹ˆˆ‡”‡…‡
„‡–™‡‡–Š‡‡ƒƒ†‡†‹ƒǡƒ†–Š‡•ƒŽŽ‡”–Š‡’”‘„ƒ„‹Ž‹–›
‘ˆ‡š…‡‡†‹‰–Š‡‡ƒ”‡–—”Ǥ



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