Historical Return for a Single Financial Asset

Dollar Return = Stock Price at the end of month – Stock Price at beginning of month + Dividends

Percentage Return = Dollar Return / Stock price at the beginning of the month

One way to measure the risk of an asset is to examine the variability of its returns

Arithmetic Average Annual Rates of Return

Return – total gain or loss experienced on an investment over a given period of time

Risk – the chance that an outcome or investment’s actual gains will differ from an expected outcome or
return

Risk Preference – your tendency to choose a risky or less risky option

3 Types of Risk Preference

1. Risk Averse
2. Risk-Neutral
3. Risk Seeking

Holding Period Return (Yield) – total return received from holding an asset or portfolio of assets over a
period of time (holding period), generally expressed as a percentage.

It is calculated on the basis of total returns from the asset or portfolio (income + changes in value)

It is particularly useful for comparing returns between investments held for different periods of time.

Formula:

Income +( End of Period Value−Initial Value )

HPR=
Initial Value
Annualized HPR=¿
Arithmetic Mean Holding Period Yield

The arithmetic mean is simply the sum of all the returns divided by the number of periods over which
the sum total is calculated. This is also called the average, or average return.

1
n
ai +a2 +...+a n
A= ∑
n i=1
ai =
n
a i , a2 … . , an=Portfolio returns for period n
 n=Number of periods
Geometric Mean Holding Period Yield

The geometric mean differs from the arithmetic average/mean. In how it is calculated because it
considers the compounding that occurs from period to period.

The geometric mean for a series of numbers is calculated by taking the product of these numbers and
raising it to the inverse of the length of the series.

¿
x 1 , x 2 , …=Portfolio returns for each period

n=Number of periods
The formula written in decimals:

¿
R=Return
n=Count of numbers∈the series
Variance

 A statistical measurement of the spread between numbers in a data set.

 Represented by the symbol " σ² "
 Commonly used by analysts and traders in determining risk and profitability of an investment
 Treats all deviations from the mean as the same regardless of their direction
 However, using the variance does not directly interpret the volatility.

Formula and Interpretations

s2=∑ ¿ ¿¿
r= rate of return

n= number of data points

Larger variance = numbers in the set are farther from the mean

Larger variance means higher risk of investment

Lower variance = numbers in the set are closer to the mean

Lower variance means lower risk of investment

Zero Variance = all values in the set are the same

Standard Deviation

 Square root of the variance denoted by the symbol " σ "

 Measures how much an investment's returns can vary from its average return
  Helps in determining the consistency of an investment's returns over a period of time
 One of the most common methods of determining the risk an investment poses
 Standard deviation helps determine market volatility or the spread of asset prices from their
average price.
 Similarly with variance, the higher the STDEV, the higher the risk of an investment.

Formula:

σ =√∑ ¿ ¿ ¿ ¿
ri=actual rate of return
r ave=rate of return
n=number of time periods
Higher STDEV = prices are more aggressive

Lower STDEV = prices are more calm

Coefficient of Variance

Coefficient of Variation (CV). The coefficient of variation (CV) is a statistical measure of how far apart
data points in a series around the mean

in finance, the coefficient of variation enables investors to determine how much volatility, or risk, is
assumed in comparison to the expected return on investment.

Lower Ratio – less risk per unit of return, so it is better or favorable risk-return trade-off

Higher Ratio – more risk per unit of return, so it might be unacceptable to a conservative or “risk-averse”
investor

σ
CV =
R(average )
Risk, along with return, is a major consideration in capital budgeting decisions.

Choosing an investment is always a matter of balancing risk and reward.