Term
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Definition
- measure past gain in value relative to initial investment
- average over multiple periods - arithmetic vs. geometric vs. dollar-weighted, depends on type of investment, cash flow patterns, etc.
- variation over multiple periods - idea: more volatility suggests investor was taking more risk, not really risk (outcomes already known |
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Term
| annual percentage rate (APR) |
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Definition
- most loans, bond contracts, etc. quote interest rates in simple annual terms
- the actual amount paid or earned should reflect compounding |
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Term
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Definition
- most returns are quoted in nominal terms
- real returns adjust out the impact of inflation |
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Term
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Definition
- expected return in based on probability and return in different possible outcomes (matter of opinion or educated guess)
- huge amount of analysis required - what are the possible futures (e.g. growth, recession, etc.), what are the probabilities that each will occur, what are the expected outcomes (returns) in each future |
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Term
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Definition
- discrete probability distribution (used to calculate expected return and standard deviation of return)
- process of devising a list of possible economic scenarious and specifying the likelihood of each one, as well as the HPR that will be realizaed in each case |
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Term
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Definition
| rate of return over a given investment period |
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Term
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Definition
| the sum of returns in each period divided by the number of periods |
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Term
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Definition
| the single per-period return that gives the same cumulative performance as the sequence of actual returns |
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Term
| dollar-weighted average return |
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Definition
| the internal rate of return on an investment |
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Term
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Definition
| list of possible outcomes with associated probabilities |
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Term
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Definition
| the mean value of the distribution of HPR |
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Term
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Definition
| the expected value of the squared deviation from the mean |
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Term
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Definition
| the square root of the variance |
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Term
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Definition
| the rate of return that can be earned with certainty |
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Term
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Definition
| an expected return in excess of that on risk-free securities |
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Term
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Definition
| rate of return in excess of the treasury-bill rate |
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Term
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Definition
| reluctance to accept risk |
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Term
| sharpe (or reward-to-volatility) measure |
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Definition
| ratio of portfolio risk premium to standard deviation |
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Term
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Definition
| ranking portfolios by their Sharpe measures |
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Term
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Definition
| the rate at which prices are rising, measured as the rate of increase of the CPI |
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Term
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Definition
| the interest rate in terms of nominal (not adjusted for purchasing power) dollars |
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Term
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Definition
- the excess of the interest rate over the inflation rate
- the growth rate of purchasing power derived from an investment |
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Term
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Definition
| portfolio choice among broad investment classes |
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Term
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Definition
| the entire portfolio including risky and risk-free assets |
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Term
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Definition
| plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio |
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Term
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Definition
| investment policy that avoids security analysis |
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Term
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Definition
| the capital allocation line using the market index portfolio as the risky asset |
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