Risk Return

LECTURE 1 Risk, Return, and Uncertainty: A Review of Principles Useful in Finance

The Concept of Return ,[object Object],[object Object],[object Object]

Measurable Return ,[object Object],[object Object],[object Object],[object Object],[object Object]

Definition ,[object Object],[object Object],[object Object],[object Object]

Holding Period Return ,[object Object],[object Object],[object Object],[object Object]

Arithmetic Mean Return ,[object Object]

Arithmetic Mean Return (cont’d) ,[object Object],[object Object],[object Object]

Geometric Mean Return ,[object Object]

Arithmetic and Geometric Mean Returns ,[object Object],[object Object],1.000 0.0000 4 1.0021 0.0021 3 0.9955 -0.0045 2 1.0084 0.0084 1 Return Relative Return Week

Arithmetic and Geometric Mean Returns (cont’d) ,[object Object],[object Object],[object Object]

Comparison of Arithmetic & Geometric Mean Returns ,[object Object],[object Object],[object Object],[object Object],[object Object]

Comparison of Arithmetic & Geometric Mean Returns ,[object Object],[object Object]

Expected Return ,[object Object],[object Object],[object Object]

Standard Deviation and Variance ,[object Object],[object Object]

Standard Deviation and Variance (cont’d) ,[object Object],[object Object]

Standard Deviation and Variance (cont’d) ,[object Object]

Semi-Variance ,[object Object],[object Object],[object Object],[object Object]

Some Statistical Facts of Life ,[object Object],[object Object],[object Object],[object Object]

Definitions ,[object Object],[object Object],[object Object],[object Object],[object Object]

Constants ,[object Object],[object Object],[object Object],[object Object]

Variables ,[object Object],[object Object],[object Object]

Variables (cont’d) ,[object Object],[object Object],[object Object],[object Object]

Populations ,[object Object],[object Object],[object Object],[object Object]

Populations (cont’d) ,[object Object],[object Object],[object Object],[object Object],[object Object]

Populations (cont’d) Positive Skewness Negative Skewness

Populations (cont’d) ,[object Object],[object Object],[object Object],[object Object]

Populations (cont’d) ,[object Object],[object Object],[object Object]

Samples ,[object Object],[object Object]

Sample Statistics ,[object Object],[object Object],[object Object],[object Object]

Properties of Random Variables ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Example ,[object Object],4% 1% 4 5% 4% 3 0% -1% 2 3% 2% 1 Stock B Stock A Month

Central Tendency ,[object Object],[object Object],[object Object]

Example (cont’d) ,[object Object]

Dispersion ,[object Object],[object Object]

Logarithms ,[object Object],[object Object],[object Object],[object Object],[object Object]

Logarithms (cont’d) ,[object Object],[object Object],[object Object],[object Object]

Expectations ,[object Object],[object Object]

Expectations (cont’d) ,[object Object]

Correlations and Covariance ,[object Object],[object Object],[object Object]

Correlations and Covariance (cont’d)

Linear Regression ,[object Object],[object Object],[object Object]

Linear Regression (cont’d) ,[object Object],[object Object],0.0005 0.0000 4 0.0019 0.0021 3 -0.0048 -0.0045 2 0.0088 0.0084 1 Index Return Stock Return Week

Linear Regression (cont’d) ,[object Object],Intercept = 0 Slope = 0.96 R squared = 0.99

R Squared and Standard Errors ,[object Object],[object Object],[object Object]

R Squared ,[object Object],[object Object],[object Object],[object Object]

Standard Errors ,[object Object]

Standard Errors (cont’d) ,[object Object],[object Object],[object Object],[object Object]

Runs Test ,[object Object],[object Object]

Notation ,[object Object],[object Object],[object Object],[object Object]

Example ,[object Object],[object Object],[object Object]

About 2.5% of the area under the normal curve is below a z score of -1.96.

Interpretation ,[object Object],[object Object]

Risk Return

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