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Chap005 - Introduction To Risk, Return and The Historical Record
Chap005 - Introduction To Risk, Return and The Historical Record
• Determined by:
– Supply
– Demand
– Government actions
– Expected rate of inflation
R r E (i )
• RThe
(1 after-tax
t ) i (rreal rate of
i )(1 return
t) i r falls
(1 tas
) the
it
inflation rate rises.
100
rf (T ) 1
P (T )
1 EAR 1 rf T 1
T
APR
1 EAR
T
1
T
E (r ) p ( s )r ( s )
s
Variance (VAR):
p ( s ) r ( s ) E ( r )
2 2
STD 2
1 n
E (r ) s 1 p ( s )r ( s ) s 1 r ( s )
n
g= geometric average
rate of return
^ 2 _ 2
1 n
r s r
n s 1
_ 2
^ 1 n
r s r
n 1 j 1
Risk Premium
SD of Excess Returns
_ 3
_ 4
R R
R R
skew average ^ kurtosis average ^ 3
3
4
• Negative skew
T
g 1
2 2
1
T gT T
[1 E (r )] e 20 e 20