This is a measure summarizing the overall past performance of an investment |
Average Return |
T or F: When people purchase a stock, they do not know what their return is going to be -either short term or in the long term run |
True |
This is defined as the volatility of an investment, which includes firm specific risk as well as market risk |
Total Risk |
This is defined as a combination of investment assets held by an investor |
Portfolio |
This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification |
Firm Specific Risk |
This is the portion of total risk that is attributable to overall economic factors |
Market Risk |
This is the term for portfolios with the highest return possible for each risk level |
Efficient Portfolios |
This is a measurement of the co-movement between two variables that range between -1 and +1 |
Correlation |
T or F: The larger the standard deviation, the higher the total risk |
True |
Investment Return: MedTech Corp stock was $51.65 per share at the end of last year. Since then, it paid a $1.15 per share dividend. The stock price is currently $63.20. If you owned 100 shares of MedTech, what was your percent return? |
24.59% |
Portfolio Weights: An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock? |
Adobe system = 0.20, Dow Chemical = 0.30, Office Depot = 0.50 |
Portfolio Return: Year-to-date, Company O had earned a -2.70 percent return. During the same time period, Company V earned 8.6 percent and Company M earned 6.85 percent. If you have a portfolio made up of 20 percent Company O, 10 percent Company V, and 70 percent Company M, what is your portfolio return? |
5.115% |
Average Return: The past five monthly returns for K and Company are 4.55 percent, 4.43 percent, -1.75 percent, 3.55 percent, and 7.55 percent. What is the average monthly return? |
3.666% |
Portfolio Weights: If you own 600 shares of Air Line Inc at $41.5, 200 shares of BuyRite at $54.75, and 300 shares of Motor City at $8.8, what are the portfolio weights of each stock? |
Air Line = 0.6472, BuyRite = 0.2846, MotorCity = 0.0682 |
Portfolio Return: At the beginning of the month, you owned $6,000 of Company G, $8,100 of Company S, and $1,200 of Company N. The monthly returns for Company G, Company S, and Company N were 7.35 percent, -1.51 percent, and -.22 percent. What is your portfolio return? |
2.05% |
Metod for calculating returns |
Dollar ReturnsPercentage Returns |
Dollar Return |
Includes capital gain or loss as well as income= Capital gain or loss + income= (ending value – beginning value) + income |
Percentage Returns |
-Returns across different investments are more easily compared because they are standardized-can be used for most types of investments=(Ending value – beginning value + Income) / Beginning Value x 100% =Capital gain yield + dividend yield |
Example: You held 250 shares of Hilton Hotel’s common stock. The company’s share price was $24.11 at the beginning of the year. During the year, the company paid a dividend of $0.16 per share, and ended the year at a price of $34.90. What is the dollar return, the percentage return, the capital gains yield, and the dividend yield for Hilton? |
Dollar return = 250 x ($34.90-$24.11+$0.16) = $2,737.50Percent return = ($34.90-$24.11+$0.16)/$24.11 = 45.42%Capital gains yield = ($34.90 – $24.11)/$24.11 = 44.75%Dividend yield = $0.16/$24.11 = 0.66% |
Computing Volatility |
-The larger the standard deviation, the higher the risk-Represents the total risk of a security or portfolio |
Standard Deviation (equation for computing volatility) |
= square root of the average deviation of returns |
Risk Vs. Return |
*With any investment, risk/return tradeoff*coefficient of variation (CoV) is a relative measure of this relation ship–amount of risk(measured by volatility) per unit of return Coefficient of variation equation |
Coefficient of variation equation |
= amount of risk / return=standard deviation / average return |
To main components of total risk |
Total Risk = Firm-specific risk + Market risk |
Firm-Specific risk |
referred to as diversifiable risk |
Market risk |
is non-diversifiable risk. This risk applies across all securities in any given market |
Modern Porftolio Theory |
-Risk is reduced when securities are combined-The optimal portfolio is the combination of securities that product the highest return for the amount of risk taken |
Adding stocks to a portfolio ________ risk |
reduces |
Diversification |
-When stocks’ return are not perfectly correlated–price movements often counteract each other -With perfect positive correlation, diversification does not affect risk |
Efficient Portfolios |
Portfolios with the highest return possible for reach risk level |
Efficient Frontier |
If we added all available securities to the graph, then all of the efficient portfolios of those securities would form this |
Efficient frontier portfolios ______________ all other possible stock portfolios |
dominate |
How does diversification work? |
*Correlation measures the tendency of two stock’s returns to move together, and is represented by pA,B -1.0 =< p =< +1.0*Perfect positive correlation means pA,B = +1.0; returns from two stocks are perfectly in sync*Perfect negative correlation means pA,B = -1.0; returns from two stocks move exactly opposite |
Portfolio Return |
Return Calculation*Rp= (Proportion of portfolio in first stock x that stock’s return) + (second stock portion x second stock return) + … = (w1 x R1) + (w2 x R2) + (w3 x R3) + …( wn x Rn) |
Example: At the beginning of 2007 you owned $5,000 of Disney stock, $10,000 of Bank of New York stock, and $15,000 of IBM stock. In 2007, the three company’s returns were -4.8 percent, 19.4 percent, and 12.8 percent respectively. What is your portfolio return?Stock:Disney, Bank of New York, IBMAmount invested: $5,000, $10,000, $15,000Weight Calculation: 5,000/30,000; 10,000/30,000; 15,000/30,000Weight: 0.1667; 0.3333; 0.50 |
Rp = (0.1667 x-4.8%) + (0.3333 x 19.4%) + (0.5 x 12.8%)= 12.07% |