Risk, Return and the Historical Record

These flashcards cover key concepts from the lecture on risk, return, and the historical record of investments, including various measures of return, risk assessments, and portfolio strategies.

What is the Holding-Period Return (HPR)?

The rate of return over a given investment period.

How do you calculate the HPR for a share of stock?

The HPR is the sum of the dividend yield and capital gains yield.

What is the arithmetic average in the context of rates of return?

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

What is the geometric average in financial terms?

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

What does the Dollar-weighted average return represent?

It is the internal rate of return on an investment.

How is the Annual Percentage Rate (APR) calculated?

APR is the per-period rate multiplied by the number of periods per year, ignoring compounding.

What is the Effective Annual Rate (EAR)?

The actual rate at which an investment grows, accounting for compounding.

What is nominal interest?

The stated interest rate on an investment without adjusting for inflation.

What does the Fisher Equation relate to?

It relates the nominal rate of interest, real rate of interest, and inflation rate.

What is Value at Risk (VaR)?

A measure of downside risk indicating the worst loss with a given probability.

What does the Sharpe Ratio compare?

It compares the portfolio risk premium to the standard deviation.

What is risk aversion?

The reluctance to accept risk associated with investments.

How is a complete portfolio defined?

It includes both risky and risk-free assets.

What types of assets are considered risk-free?

Treasury bonds, government bonds, and money market instruments.

What is the Capital Allocation Line (CAL)?

The plot of risk-return combinations available by varying allocation between risky and risk-free assets.

What does active management in investing aim for?

It aims for higher returns compared to passive investing strategies.