Chapter 1
The geometric average return answers the question
"What was your average compound return per year over a particular period?"
The arithmetic average return answers the question
"What was your return in an average year over a particular period?"
dollar-weighted average return.
Average Compound rate of return earned per year over a multiyear period accounting for investment inflow and out flows.
Annualized Return
EAR = ( 1 + HPR)^M-1
Holding Period Return
P.33-P.0/ P.0
Arithmetic Average Return
Sum up the return then divide by total number of years.
Dividend Yield
The annual stock dividend as a percentage of the initial stock price
Capital gains yield
This yield is calculated as the change in the price during the year ( the capital gain) divided by the beginning price.
Total dollar return
Total dollar return = Dividend income + Capital gain (or loss)
Arithmetic Average tend to be too high over longer period
True
Geometric Average Return is always be equal to or less than Arithmetic Average.
True
Geometric Average is low to over the short period
True
Holding period is less than one year then EAR will be greater than the HPR.
True
If Holding period is greater than one year then EAR will be small than the HPR.
True
In Finance we use Standard Deviation rather than variance.
True
Less Variance is less risk
True
The standard deviation declines as the number of securities is increased.
True
the geometric average return is approximately equal to the arithmetic average return minus half the variance.
True
when we say "average return," we mean arithmetic average unless we explicitly say otherwise.
True
Blume's Formula
Uses arithmetic + geometric average to calculate
To calculate the variances of the expected returns on our two stocks, we first determine the squared deviations from the expected return. We then multiply each possible squared deviation by its probability. Next we add these up, and the result is the variance.
Variances
Geometric Average Return
Your average compound return per year over the five years periods.
Arithmetic Average Return
Your return in an average year over the five years periods
