Term
| by theory, required return should depend on the |
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Definition
risk of investment, but there is a reward for bearing risk.
greater potential reward, greater risk. |
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Term
| percentage return on a security is the percentage change in wealth tom holding a security over a period of time |
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Definition
r1=D1/P0+ P1-P0/P0
percentage changes are used to standardize the size of the investment |
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Term
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Definition
| dividends and capital gains |
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Term
| dollar returns are labeled: |
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
| dividend yield + capital gains yield |
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Term
| How much do you have at the end of the year if your total investment is $1000? (example) |
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Definition
| investment x (1+total percentage return) |
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Term
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Definition
| higher return, and more uncertainty |
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Term
| Arithmatic Average Return |
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Definition
the MEAN of yearly returns (sum of the yearly returns divided by the number of years)
what you earned in a typical year
investment return + investment return/time |
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Term
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Definition
the average compound return earned per year over the investment period (what you actually earned per year on average [its analogous to an IRR]
[(1+r1)*(1+r2)*...]^1/t-1
*better in long term* |
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Term
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Definition
the reward (extra return) for bearing risk
the difference between a risky investment return and the risk free rate gives the risk premium |
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Term
| treasury bills are considered to be |
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Definition
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Term
| risky investment return - risk free rate = |
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Definition
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Term
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Definition
variance or
standard deviation of returns |
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Term
| Historical Variance is divided by T-1 because |
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Definition
| we used one "degree of freedom" to estimate the mean |
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Term
| Historial Variance formula |
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Definition
| (r1-mean)^2+(r2-mean)^2+.../T-1 |
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Term
| Standard Deviation is the |
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Definition
| square root of the variance |
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Term
| Risky investments an earn a |
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Definition
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Term
| the greater the potential reward, the |
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Definition
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Term
| What causes stock price fluctuation? |
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Definition
| prices change as new information arrives and investors reassess values based on that information |
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Term
| the market is efficient when |
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Definition
| prices adjust quickly and correctly when new information arrives |
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Term
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Definition
stock prices are "fairly" priced and fully reflect available information
earn a return appropriate for level of risk taken
should not be able to earn "abnormal" returns |
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Term
| Efficient markets hypothesis (EMH) |
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Definition
asserts that modern US stock markets are efficient
securities represent ZERO NPV investments (expected to return exactly their risk-adjusted rate) |
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Term
| The 3 Forms of Market Efficiency based on how much info is impounded in stock prices |
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Definition
Weak (past prices of that stock)
Semi-strong (all public information)
Strong (all info, public and private) |
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Term
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Definition
at a minimum, the current price reflects the stock's own past prices
the current price reflects all the info from the stock's own past prices
can't make abnormal returns on the basis of a stock's historical prices
Empirical evidence generally supports Weak form efficiency |
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Term
| Semi-Strong form efficiency |
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Definition
all public information (news, finance. statements) is reflected in stock prices
very controversial
Implies that Fundamental Analysis won't provide excess returns
Doesn't mean Fundamental Analysis is useless. (without it markets wouldn't be efficient)
evidence generally supports semi-strong |
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Term
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Definition
all information of every kind is reflected (including inside info)
implies that even insiders with special knowledge cannot make an abnormal profit
not much support for strong
regulations against insider trading is evidence against it |
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Term
| on average, greater risk yields |
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Definition
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Term
| standard deviation of returns is a measure of |
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Definition
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