03 - Risk and Return
Holding-period Return (HPR)
Rate of return over a given investment period.
The sum of returns in each period divided by the number of periods.
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 on an investment.
Annual Percentage Rate
An approximation of the rate of return earned in a year.
Effective Annual Rate
The actual rate of return earned in a year.
Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realised in each case.
List of possible outcomes with associated probabilities.
The mean value of the distribution of HPR.
Value at Risk (VaR)
Measure of the downside risk (loss that will be suffered given an extreme adverse price change).
Measure of the fatness of the tails of a probability distribution (indicates likelihood of extreme outcomes).
Measure of the asymmetry.
The rate of return that can be earned with certainty.
An expected return in excess of that on risk-free securities.
Rate of return in excess of the risk-free rate.
Reluctance to accept risk.
Sharpe (Reward-to-volatility measure)
Ratio of portfolio risk premium to standard deviation.
Ranking portfolios by their Sharpe measures.
The rate at which the general level of prices for goods and services is rising.
Nominal Interest Rate
The interest rate in terms of nominal (not adjusted for purchasing power) dollars.
Real Interest Rate
The excess of the interest rate over the inflation rate.
The growth rate of purchasing power derived from an investment.
Allocation of an investment portfolio across broad asset classes.
The entire portfolio including risky and risk-free assets.
Capital Allocation Line (CAL)
Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio.
Investment policy that avoids security analysis.
Capital Market Line
The capital allocation line (CAL) using the market index portfolio as the risky asset.
03 - Risk and Return
221 - Risk and Return