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    CH 6 Investment Notes

    Uploaded by

    Walid Mohamed Anwar
    This document defines key concepts related to investment returns and risk. It discusses that total return consists of yield from income and price appreciation/depreciation. It also describes the two main types of risk: systematic/general risk that affects all securities and cannot be avoided, and unsystematic/specific risk that is unique to a particular issuer. The document then provides examples of different types of risk such as market risk, interest rate risk, inflation risk, and liquidity risk. It also discusses the differences between arithmetic and geometric means for calculating returns over time as well as concepts like risk premiums.

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    CH 6 Investment Notes

    Uploaded by

    Walid Mohamed Anwar
    49 views3 pages
    This document defines key concepts related to investment returns and risk. It discusses that total return consists of yield from income and price appreciation/depreciation. It also describes the two main types of risk: systematic/general risk that affects all securities and cannot be avoided, and unsystematic/specific risk that is unique to a particular issuer. The document then provides examples of different types of risk such as market risk, interest rate risk, inflation risk, and liquidity risk. It also discusses the differences between arithmetic and geometric means for calculating returns over time as well as concepts like risk premiums.

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    CH 6 Investment Notes

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    This document defines key concepts related to investment returns and risk. It discusses that total return consists of yield from income and price appreciation/depreciation. It also describes the two main types of risk: systematic/general risk that affects all securities and cannot be avoided, and unsystematic/specific risk that is unique to a particular issuer. The document then provides examples of different types of risk such as market risk, interest rate risk, inflation risk, and liquidity risk. It also discusses the differences between arithmetic and geometric means for calculating returns over time as well as concepts like risk premiums.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    49 views3 pages

    CH 6 Investment Notes

    Uploaded by

    Walid Mohamed Anwar
    This document defines key concepts related to investment returns and risk. It discusses that total return consists of yield from income and price appreciation/depreciation. It also describes the two main types of risk: systematic/general risk that affects all securities and cannot be avoided, and unsystematic/specific risk that is unique to a particular issuer. The document then provides examples of different types of risk such as market risk, interest rate risk, inflation risk, and liquidity risk. It also discusses the differences between arithmetic and geometric means for calculating returns over time as well as concepts like risk premiums.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Return Components

    Returns consist of two elements:



    1. Yield :Periodic cash flows such as interest or dividends (income return)
    2. Price appreciation or depreciation (capital gain or loss):The change in price
    of the asset

    Total Return =Yield +Price Change


    Risk Types
    Risk is the chance that the actual outcome from an investment will differ from
    the expected outcome.
    Risk is often associated with the dispersion (variability) in the likely
    outcomes. , and the standard deviation is a statistical measure of variability
    or dispersion.
    1. Systematic (general) risk

    Pervasive, affecting all securities, cannot be avoided
    Interest rate or market or inflation risks

    2. Nonsystematic (specific) risk: Unique characteristics specific to issuer
    Total Risk = General Risk + Specific Risk
    1. Interest Rate Risk: The risk that interest rates rises
    2. Market Risk: is the variability in returns due to fluctuations in the overall
    market. It includes a wide range of factors exogenous to securities
    themselves.
    3. Business risk is the risk of doing business in a particular industry or environment.
    4. Interest rate risk and inflation risk are clearly directed related. Interest rates and inflation
    generally rise and fall together.
    5. Country risk is the same thing as political risk. It refers to the political and economic
    stability and viability of a countrys economy. The

    P
    ) P (P CF
    TR
    B
    B E t

    6. Inflation Risk: Purchasing power variability


    7. Financial Risk(Credit ): Tied to debt financing
    8. Liquidity risk the risk of failing to liquidate assets easily and quickly
    9. Exchange Rate Risk: Fluctuations in exchange rate

    Return
    1. Historical returns are realized returns( Ex-Post)
    2. Expected returns are returns expected to occur in the future(EX-Ante)
    Arithmetic Mean Vs Geometric Mean
    1. Arithmetic mean, or simply mean =average of returns

    2. Geometric mean reflects compound, cumulative returns over more than one
    period

    The geometric mean is a better measure of the change in wealth over more
    than a single period. Over multiple periods the geometric mean indicates
    the compound rate of return, or the rate at which an invested dollar grows,
    and takes into account the variability in the returns.

    The geometric mean is always less than the arithmetic mean because it allows for the
    compounding effect--the earning of interest on interest.

    Return Relative RR=1+TR

    Cumulative Wealth Index =CWI measures the cumulative effect of returns over
    time, typically on the basis of $1 invested.

    CWI =[1+GM]
    1/n
    or = WI
    0
    (1 + TR
    1
    )(1 + TR
    2
    ) . . . (1 + TR
    n
    )
    Adjusting Returns for Inflation
    Returns measures are not adjusted for inflation
    Purchasing power of investment may change over time
    Consumer Price Index (CPI) is possible measure of inflation
    ) TR )...( TR )( TR (
    /n
    n
    1 1 1 1
    1
    2 1





    Risk Premiums
    Premium is additional return earned or expected for additional risk
    Equity risk premium is the difference between stock and risk-free returns
    Bond horizon premium is the difference between long- and short-term
    government securities




    CPI
    TR
    TR
    IA
    1
    1
    1

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