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Chapter 5 Risk and Return

5.1 RATES OF RETURN

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Learning objectives

Use data on the past performance of stocks and bonds to

characterize the risk and return features of these investments Determine the expected return and risk of portfolios that are constructed by combining risky assets with risk-free investment in Treasury bills Evaluate the performance of a passive strategy

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Holding Period Return

The holding period return (HPR)(보유기간수익률) Depends on the increase (or decrease) in the price of the share ...view middle of the document...

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Averaging(평균)

• Arithmetic average : (산술평균) – The sum of returns in each period divided by the number of

periods Arithmetic ra = (r1 + r2 + r3 + ... rn) / n ra = (.10 + .25 - .20 + .25) / 4 = .10 or 10% • Geometric average : (기하평균) – the single per-period return that gives the same cumulative performance as the sequence of actual returns Geometric rg = {[(1+r1) (1+r2) .... (1+rn)]} 1/n - 1 rg = {[(1.1) (1.25) (.8) (1.25)]} 1/4 - 1 = (1.5150) 1/4 -1 = .0829 8.29% McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Dollar Weighted Returns (금액가중 평균수익률)

Internal Rate of Return (IRR) - the discount rate that

results in present value of the future cash flows being equal to the investment amount Considers changes in investment Initial Investment is an outflow Ending value is considered as an inflow Additional investment is a negative flow Reduced investment is a positive flow

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Dollar Weighted Average Using Text Example

Net CFs $ (mil) 1 2 - 0.1 -0 .5 3 0.8 4 1.0

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Quoting Conventions (투자수익률 고시)

APR = annual percentage rate

(periods in year) X (rate for period) EAR = effective annual rate ( 1+ rate for period)Periods per yr – 1

Example: monthly return of 1%

APR = 1% X 12 = 12% EAR = (1.01)12 - 1 = 12.68%

McGraw-Hill/Irwin

© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

APR vs EAR

The relationship between the APR and EAR

EAR=( 1+ rate for period)Periods per yr – 1

McGraw-Hill/Irwin

© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Example 5.2

Suppose you buy a $10,000 face value Treasury bill maturing in one

month for $9,900. On the bill’s maturity date, you collect the face value. Since there are no other interest payments, the holding return for this one month investment is :

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

5.2 RISK AND RISK PREMIUMS

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Scenario Analysis and Probability Distributions (시나리오 분석과 확률분포)

How to measure risk with the HPR Scenario Analysis

Process of devising a list of possible economic scenarios and

specifying the likelihood of each one, as well as the HPR that will be realized in each case i.e.) Boom, Normal growth, Recession

State of the Economy Boom Normal growth Recession

Scenario 1 2 3

probability 0.25 0.50 0.25

HPR 44% 14% -16%

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Scenario Analysis and Probability Distributions

Probability distributions The list of possible HPRs with associated probabilities

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© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Expected...

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