PORFOLIO RISK AND RETURN

CHAPTER 6
RETURN ON FINANCIAL ASSET
• TOTAL RETURN-
The actual rate of return of an investment over a period of
time it includes interest, capital gains, dividends.

• PERIODIC INCOME
It refers to the regular, recurring payments or earnings
received at specific intervals, such as weekly, monthly or
annually
CAPITAL GAIN OR LOSS

• CAPITAL GAIN-when the selling price of an asset is

higher than its purchase price resulting in profit.

• CAPITAL LOSS- Occurs when the selling price is lower

than the purchase price leading to financial loss
• AVERAGE RETURN
- The average return is the simple mathematical average of
a series of returns generated over a specified period of time
• ARITHMETIC or MEAN RETURN- The arithmetic or
mean return is the simple average of all holding period
returns

• GEOMETRIC MEAN RETURN- It is a measure of the

average rate of return on an investment, taking
compounding into account. It provides more accurate
representation of an investment’s overall performance.
• MONEY WEIGHTED RETURN - Is a measure of the
performance of an investment it is calculated by finding
the rate

• ANNUALIZED RETURN- is a measured used to express

the average rate of return on an investment per year
GROSS AND NET RETURNS
• GROSS RETURNS - refers to the total return on an
investment before deducting any fees, taxes or other
expenses

• NET RETURNS- The return on investment after deducting

all associated costs, fees, and taxes. It represent the
actual profit or loss and net returns provides more
accurate measure of the investment performance
gross returns- expenses= net returns
• PRE-TAX- refers to income or financial figures before any
taxes are deducted. It includes earnings or amounts
before accounting for income tax

• AFTER TAX NOMINAL RETURN- it is the net return on

an investment of financial instrument after accounting for
taxes.
pre-tax nominal return - tax =after tax nominal return
• NOMINAL RETURNS - refers to the net increase or
decrease in the value of an investment or asset without
adjusting for inflation.

• REAL RETURNS- represent the net increase or decrease

in the value of an investment after considering the eroding
effects of inflation.
VARIANCE OF A PORTFOLIO OF ASSET
• VARIANCE gauges the volatility or risk associated with
the porfolio. A lower variance indicates more stable and
predictable returns, while a higher variance suggest
greater volatility and uncertainty.
UTILITY THEORY
• It is often use to analyze consumer choices investment
decisions, and various aspects of economic behavior. It
provides a framwork for understanding how individuals
make decisions in the face of uncertainty and limited
resources.
THANK YOU