Intermediate Investments Chapter 5 Book Vocab

Holding Period Return (HPR)

Rate of return over a given investment period.

Holding Period Formula

(P1-P0+D)/P0 \= Dividend Yield + Capital Gains Yield

Arithmetic Average

The sum of returns in each period divided by the number of periods

Geometric Average

The single per-period return that gives the same cumulative performance as the sequence of actual returns.

Dollar-Weighted Average Return

The internal rate of return (IRR) on an investment.

Annual Percentage Rates (APRs)

Annualize per-period rates using a simple interest approach, ignoring compound interest

Effective Annual Rate (EAR)

The rate at which invested funds actually grow

Nominal Interest Rate

The interest rate in terms of nominal (not adjusted for purchasing power) dollars.

Real Interest Rate

The growth rate of purchasing power derived from an investment.

Inflation Rate

The rate at which prices are rising, measured as the rate of increase of the CPI.

Scenario Analysis

A list of possible economic scenarios, the likelihood of each, and the HPR that will be realized in each case.

Probability Distribution

List of possible outcomes with associated probabilities.

Expected Return

The mean value of the distribution of HPR.

Variance

The expected value of the squared deviation from the mean.

Standard deviation

The square root of the variance.

Value at risk (VaR)

Measure of downside risk. The worst loss that will be suffered with a given probability, often 1% or 5%.

Kurtosis

Measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.

Skew

The asymmetry of the distribution

Risk-Free Rate

The rate you earn on Treasury bills.

Risk-Premium

An expected return in excess of that on risk-free securities.

Excess Returns

Rate of return in excess of the risk-free rate.

Risk Aversion

Reluctance to accept risk.

Sharpe Ratio

Ratio of portfolio risk premium to standard deviation.

Mean-Variance Analysis

Evaluating portfolios according to their expected returns and standard deviations (or variances).

Asset Allocation

Portfolio choice among broad investment classes.

Capital Allocation to Risky Assets

The choice between risky and risk-free assets.

Capital Allocation Line

Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio.

Passive Strategy

Investment policy that avoids security analysis. Often entails indexing.

Capital Market Line (CML)

The capital allocation line using the market index portfolio as the risky asset