Chapter 10 Risk and Return FinMan244 Summary

CHAPTER 10: RISK AND RETURN
10.2 ASSESSING THE RETURN AND RISK CHARACTERISTIC OF A SINGLE
SECURITY
Two perspectives:
• Ex post = using historical data
• Ex ante = using expected/future values




10.2.1 EVALUATING HISTORICAL RETURNS à Ex post
Always express answer as %

CALCULATING HISTORICAL RETURNS FOR MULTIPLE YEARS

1. ARITHMETIC AVERAGE




2. GEOMETRIC AVERAGE




à Advantage: incorporates the concept of compounding

To determine if the returns are good or bad: benchmark




Investors should consider level of inflation over evaluation period as inflation erodes purchasing
power

10.2.2 EVALUATING EXPECTED RETURNS à Ex ante
Investors confronted with uncertainty.

USING PROBABILITY THEORY

, CHAPTER 10: RISK AND RETURN
10.2 ASSESSING THE RETURN AND RISK CHARACTERISTIC OF A SINGLE
SECURITY
Two perspectives:
• Ex post = using historical data
• Ex ante = using expected/future values




10.2.1 EVALUATING HISTORICAL RETURNS à Ex post
Always express answer as %

CALCULATING HISTORICAL RETURNS FOR MULTIPLE YEARS

1. ARITHMETIC AVERAGE




2. GEOMETRIC AVERAGE




à Advantage: incorporates the concept of compounding

To determine if the returns are good or bad: benchmark




Investors should consider level of inflation over evaluation period as inflation erodes purchasing
power

10.2.2 EVALUATING EXPECTED RETURNS à Ex ante
Investors confronted with uncertainty.

USING PROBABILITY THEORY