Investments - Chapter 5: Risk, Return & The Historical Record

Flashcards covering important concepts related to investments, risk, and return as explained in Chapter 5 of the lecture notes.

Holding Period Return (HPR)

The return earned from holding an investment over a specific period.

Sharpe Ratio

A measure that indicates the average return minus the risk-free rate divided by the standard deviation of return on an investment.

Expected Return

The anticipated return on an investment based on its historical performance and current market conditions.

Risk Premium

The return in excess of the risk-free rate of return that investors require for choosing a risky investment.

Annual Percentage Rate (APR)

An annualized rate that does not take compounding into account; often used in lending and credit.

Effective Annual Rate (EAR)

The actual annual rate of return taking into account the effects of compounding.

Normal Distribution

A probability distribution that is symmetrical about the mean, indicating that data near the mean are more frequent in occurrence.

Standard Deviation (STD)

A measure of the amount of variation or dispersion of a set of values.

Variance (VAR)

The expectation of the squared deviation of a random variable from its mean, indicating how much spread out the values are.

Value at Risk (VaR)

A statistical technique used to measure the risk of loss on an investment.

Excess Return

The return on an investment beyond the risk-free rate.

Risk Aversion

The tendency to prefer certainty over uncertainty, leading to a reluctance to accept risk.

Capital Allocation Line (CAL)

A line that represents the risk-return combinations available to investors by varying their portfolio allocation between a risk-free asset and a risky portfolio.

Mean-Variance Analysis

A process for evaluating the expected return and risk of a portfolio based on the means and variances of individual investments.

Kurtosis

A statistical measure that describes the distribution of data points in the tails relative to the overall shape of the distribution.

Skewness

A measure of the asymmetry of the probability distribution of a real-valued random variable about its mean.