Investment Risk and Return Study Guide

Annualizing Treasury-Bill Returns

This content demonstrates calculating holding period return, annual percentage rate, and effective annual rate for Treasury-bill investments using continuous compounding.

• Holding period return
• Annual percentage rate
• Effective annual rate
• Continuous compounding
• Treasury-bill returns

• Understanding the Fisher Equation: Nominal vs. Real Interest Rates

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Nominal and Real Rates of Return

Distinguishing between nominal interest rates and real interest rates involves calculating the change in purchasing power relative to the inflation rate.

• nominal interest rate
• real interest rate
• inflation rate
• purchasing power
• consumer price index (CPI)
• Fisher effect

Calculating and Annualizing Rates of Return

This content explains how to compute arithmetic, time-weighted, and dollar-weighted average monthly returns, as well as how to annualize rates of return using annual percentage rates and effective annual rates.

• Internal Rate of Return (IRR)
• Dollar-weighted return
• Time-weighted return
• Geometric average monthly returns
• Annualizing rates of return
• Annual percentage rates (APR)
• Effective annual rate (EAR)
• Compounding interest
• Holding period return

Annualizing Treasury-Bill Returns

This content demonstrates calculating holding period return, annual percentage rate, and effective annual rate for Treasury-bill investments using continuous compounding.

• Holding period return
• Annual percentage rate
• Effective annual rate
• Continuous compounding
• Treasury-bill returns

• Annualizing Treasury-Bill Returns

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Inflation and Nominal Interest Rates

The text analyzes the relationship between average nominal rates on T-bills, inflation rates, and real returns across different historical periods.

• average nominal rate
• average inflation rate
• average real return
• standard deviation of the real rate
• T-bills
• volatility

Nominal and Real Rates of Return

Distinguishing between nominal interest rates and real interest rates involves calculating the change in purchasing power relative to the inflation rate.

• nominal interest rate
• real interest rate
• inflation rate
• purchasing power
• consumer price index (CPI)
• Fisher effect

Calculating and Annualizing Rates of Return

This content explains how to compute arithmetic, time-weighted, and dollar-weighted average monthly returns, as well as how to annualize rates of return using annual percentage rates and effective annual rates.

• Internal Rate of Return (IRR)
• Dollar-weighted return
• Time-weighted return
• Annualizing rates of return
• Annual percentage rates (APR)
• Effective annual rate (EAR)
• Compounding interest
• Holding period return

Inflation and Nominal Interest Rates

The text analyzes the relationship between average nominal rates on T-bills, inflation rates, and real returns across different historical periods.

• average nominal rate
• average inflation rate
• average real return
• standard deviation of the real rate
• T-bills
• volatility

• Understanding Investment Risk and Return

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Risk and Risk Premiums

This section explores how to measure investment risk using scenario analysis and probability distributions of holding-period returns.

• investment risk
• holding-period returns
• scenario analysis
• probability distributions
• expected return
• mean return

Measuring Investment Returns Over Multiple Periods

This content discusses measuring investment returns over multiple periods and the use of holding-period return for mutual fund performance.

• Holding-period return
• Investment return
• Mutual fund performance
• Assets under management
• Net inflow

Measuring Investment Fund Performance Returns

This text discusses characterizing fund performance over an entire period using arithmetic average, geometric average, and dollar-weighted return measures.

• arithmetic average
• geometric average
• dollar-weighted return
• time-weighted average return
• internal rate of return
• assets under management
• net cash flows
• cumulative performance

Risk, Return, and the Historical Record

This chapter covers computing measures of return on multiyear investments and using historical data or forward-looking scenario analysis to characterize risk and return features.

• measures of return on multiyear investments
• historical data on stocks and bonds
• forward-looking scenario analysis
• expected return and risk of portfolios
• risk-free investments in Treasury bills
• Sharpe ratio
• capital allocation

Probability and Return Statistical Analysis

A table structure displays probability, HPR %, mean return, variance, and standard deviation (%) to quantify investment risk.

• Probability
• HPR %
• Mean return
• Deviation from mean return
• Squared deviation from mean return
• Variance
• Standard deviation (%)

Calculating Holding-Period Return for Stocks

The holding-period return reflects the increase or decrease in share price and dividend income, calculated as the sum of dividend yield and capital gains yield.

• holding-period return (HPR)
• dividend yield
• capital gains yield
• price appreciation
• cash dividend
• reinvestment

Investment Portfolio Construction and Risk Analysis

An examination of constructing portfolios using various assets, measuring expected return and volatility, and evaluating risk-reward trade-offs through capital allocation.

• expected return
• volatility
• risk-reward trade-off
• capital allocation
• risk control
• derivatives
• scenario analysis
• passive strategy
• diversified portfolios

Risk and Risk Premiums

This section explores how to measure investment risk using scenario analysis and probability distributions of holding-period returns.

• investment risk
• holding-period returns
• scenario analysis
• probability distributions
• expected return
• mean return

Probability and Return Statistical Analysis

A table structure displays probability, HPR %, mean return, variance, and standard deviation (%) to quantify investment risk.

• Probability
• HPR %
• Mean return
• Deviation from mean return
• Squared deviation from mean return
• Variance
• Standard deviation (%)

Measuring Investment Fund Performance Returns

This text discusses characterizing fund performance over an entire period using arithmetic average, geometric average, and dollar-weighted return measures.

• arithmetic average
• geometric average
• dollar-weighted return
• time-weighted average return
• internal rate of return
• assets under management
• net cash flows
• cumulative performance

Calculating Holding-Period Return for Stocks

The holding-period return reflects the increase or decrease in share price and dividend income, calculated as the sum of dividend yield and capital gains yield.

• holding-period return (HPR)
• dividend yield
• capital gains yield
• price appreciation
• cash dividend
• reinvestment

Measuring Investment Returns Over Multiple Periods

This content discusses measuring investment returns over multiple periods and the use of holding-period return for mutual fund performance.

• Holding-period return
• Investment return
• Mutual fund performance
• Assets under management
• Net inflow

Efficient Market Hypothesis Assessment

A multiple-choice assessment regarding phenomena consistent with or a violation of the efficient market hypothesis.

• efficient market hypothesis
• professionally managed mutual funds
• outperform the S&P 500
• risk-adjusted basis

Annualizing Treasury-Bill Returns

This content demonstrates calculating holding period return, annual percentage rate, and effective annual rate for Treasury-bill investments using continuous compounding.

• Holding period return
• Annual percentage rate
• Effective annual rate
• Continuous compounding
• Treasury-bill returns

Summary Statistics and Variance Estimation

This material discusses calculating average, standard deviation, variance, and covariance while adjusting for loss of degree of freedom in sample estimates.

• Average
• Covariance
• Standard deviation
• Variance
• Loss of degree of freedom
• STDEV.P
• STDEV.S
• Statistical reliability of historical estimates
• Correlation coefficients
• Scatter diagram

Summary Statistics and Variance Estimation

This material discusses calculating average, standard deviation, variance, and covariance while adjusting for loss of degree of freedom in sample estimates.

• Average
• Covariance
• Standard deviation
• Variance
• Loss of degree of freedom
• STDEV.P
• STDEV.S
• Statistical reliability of historical estimates
• Correlation coefficients
• Scatter diagram

Asset Allocation with Risky Assets

A spreadsheet containing financial data related to asset allocation with two risky assets including rates of return and deviations from average returns.

• Asset Allocation
• Risky Assets
• Rates of Return
• Deviations from Average Returns
• Products of Deviations

Portfolio Weights and Expected Return Calculations

A spreadsheet containing input data for variable labels, expected return, and standard deviation to compute portfolio weights and minimum-variance portfolio values.

• Expected Return
• Portfolio Weights
• Standard Deviation
• Minimum-variance portfolio
• Short positions

Investment Opportunity Set for Stocks and Bonds

This document analyzes portfolio theory regarding investment opportunity sets for stocks and bonds with various correlation coefficients, portfolio expected return, and portfolio standard deviation.

• portfolio theory
• correlation coefficients
• portfolio expected return
• portfolio standard deviation
• minimum-variance portfolio
• diversification benefits
• negative correlation
• perfect positive correlation
• perfect negative correlation
• weights in stocks

Diversification Benefits and Negative Correlation

Equation 6.7 can be solved for the proportions with perfect negative correlation, where the benefits from diversification stretch to the limit.

• perfect negative correlation
• benefits from diversification
• proportions

Covariance and Correlation of Fund Returns

A spreadsheet calculates the covariance between the returns of the stock and bond funds and the resulting correlation coefficient.

• Covariance
• Correlation coefficient
• Stock fund deviation
• Bond fund deviation
• Probability
• Standard deviation

Efficient Frontiers and International Diversification

This text examines how international diversification is beneficial by analyzing the efficient frontier, capital allocation line, and risk premium metrics.

• international diversification
• efficient frontier
• global minimum-variance portfolio
• Sharpe ratio
• risk premium
• standard deviation
• capital allocation line
• short sales
• excess returns
• correlation matrix

Passive Strategies and the Capital Market

The text examines historical equity performance, the risk premium, and the costs and benefits of passive versus active investing strategies.

• U.S. equity investors
• risk premium
• risk-reward trade-off
• passive strategy
• active strategy
• index fund
• ETF
• money market fund
• expense ratio
• power of compounding
• active management industry

Market Index Return Distribution Analysis

A comparison of actual market index monthly excess returns frequency against a theoretical normal distribution to illustrate fat tails and kurtosis.

• Frequency distribution
• Monthly excess returns
• Market index
• Normal distribution
• Fat tails
• Kurtosis
• Extreme positive and negative returns

Four-Factor Alpha Mutual Fund Performance

A frequency distribution of four-factor alphas for U.S. domestic equity funds shows a bell-shaped distribution with a slightly negative mean.

• four-factor model
• expected return
• frequency distribution
• alpha
• U.S. domestic equity funds
• style-matched benchmarks
• gross investment returns
• net alphas
• persistence in relative performance
• wasteful portfolio decisions

Consistency of Investment Results Analysis

An analysis of the consistency of investment results and the percentage of top-half equity funds that outperform.

• Consistency of investment results
• Top-half equity funds
• Domestic equity funds
• Large-cap equity funds
• Small-cap equity funds
• Outperformance percentage

Efficient Market Hypothesis and Prediction Bias

The efficient market hypothesis implies that security analysis may not improve investment performance due to the magnitude issue, selection bias issue, and lucky event issue.

• Efficient Market Hypothesis
• magnitude issue
• selection bias issue
• lucky event issue
• security analysis
• investment performance
• market volatility
• standard deviation

Risk Adjustment and P/E Ratios

An alternative interpretation suggests that if a model of expected returns does not adjust for risk, riskier stocks will sell at a lower price and lower P/E ratio.

• expected earnings
• risk
• P/E ratio
• expected returns

Persistence of Mutual Fund Performance

The text examines the risk-adjusted performance of professional managers and whether alpha persists or reverts to the mean in relation to market efficiency.

• Persistence of alpha
• Mutual fund performance
• Market efficiency
• Berk and Green model
• Bond fund manager performance
• Passive strategies
• Stock-picking ability
• Risk-adjusted performance

Portfolio Weights and Expected Return Calculations

The spreadsheet calculates expected return, $E(r_p)$, and standard deviation for different portfolio weights of stocks and bonds.

• Portfolio Weights
• Expected Return
• Standard Deviation
• Stock weights
• Bond weights
• $\sigma_B$
• $\rho_{bs}$

Statistical Significance and Market Anomalies

• p-hacking
• statistical significance
• market anomalies
• research malpractice
• arbitrageurs
• out-of-sample findings

Style Portfolio Returns and GDP Growth

A vertical bar chart compares HML and SMB portfolio past-year returns across various international markets.

• Vertical Bar Chart
• HML (High-minus-low portfolio)
• Past-year return (%)
• GDP growth
• International markets

Asset Prices and Trading Opportunities

The text discusses whether asset prices may be of arbitrary and obvious trading opportunities.

• asset prices
• trading opportunities