Escolar Documentos
Profissional Documentos
Cultura Documentos
By Akash Saxena
Return on a Single Asset
Total return
Rate of return Dividend yield Capital gain yield
= Dividend
DIV1 P1 P0 DIV1 P1 P0
+ Capital R1
P0
P0
P0
gain
160.00 149.70
T o ta l R e tu r n (% ) 140.00
Year-to-
120.00
100.00 92.33
80.00 70.54
Returns on
20.00 7.29
0.00
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
By Akash Saxena
Average Rate of Return
The average rate of return is the sum of the
various one-period rates of return divided by
the number of period.
Formula for the average rate of return is as
follows:
n
1 1
R = [ R1 R 2 R n ]
n n
R t
t =1
By Akash Saxena
Risk of Rates of Return: Variance
and Standard Deviation
Formulae for calculating variance and
standard deviation:
Standard deviation = Variance
1 n
2
2
n 1 t 1
Rt R
By Akash Saxena
10
10 0
1
1969-70
Index
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
Inflation
1977-78 91-day TB
1978-79
1979-80
Call Money Market
1980-81
Stock Market Return
1981-82
Long-term Govt. Bonds
1982-83
1983-84
1984-85
By Akash Saxena
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
Investment Worth of Different
1995-96
Portfolios, 1969–70 to 1997–98
1996-97
1997-98
Year
4.41
10.20
10.36
13.99
57.16
Averages and Standard Deviations,
1970–71 to 1997–98
Arithmetic Standard Risk Risk
Securities mean deviation premium* premium#
By Akash Saxena
Expected Return : Incorporating
Probabilities in Estimates
The expected
RETURNS UNDER VARIOUS ECONOMIC CONDITIONS
sum of the
Decline 243.50 2.00 0.008 – 0.068 – 0.060
product of
each outcome
(return) and its RETURNS AND PROBABILITIES
associated
Economic Conditions Rate of Return (%) Probability Expected Rate of Return (%)
(1) (2) (3) (4) = (2) (3)
Growth 18.5 0.25 4.63
probability: Expansion
Stagnation
Decline
10.5
1.0
– 6.0
0.25
0.25
0.25
2.62
0.25
– 1.50
1.00 6.00
By Akash Saxena
Expected Risk and Preference
The following formula can be used to
calculate the variance of returns:
2 R1 E R 2 P1 R2 E R 2 P2 ... Rn E R 2 Pn
n
Ri E R 2 Pi
i 1
By Akash Saxena
Expected Risk and Preference
A risk-averse investor will choose among
investments with the equal rates of return, the
investment with lowest standard deviation.
Similarly, if investments have equal risk
(standard deviations), the investor would prefer
the one with higher return.
A risk-neutral investor does not consider risk,
and would always prefer investments with higher
returns.
A risk-seeking investor likes investments with
higher risk irrespective of the rates of return. In
reality, most (if not all) investors are risk-averse.
By Akash Saxena
Normal Distribution
Normal distribution is an important concept in
statistics and finance. In explaining the risk-
return relationship, we assume that returns
are normally distributed.
Normal distribution is a population-based,
theoretical distribution.
By Akash Saxena