Presentation is loading. Please wait.

Presentation is loading. Please wait.

Learning about Return and Risk from The Historical Record

Published byRobert Hamilton Modified over 9 years ago

Similar presentations

Presentation on theme: "Learning about Return and Risk from The Historical Record"— Presentation transcript:

1 Learning about Return and Risk from The Historical Record
Chapter 5 Bodi Kane Marcus Ch 5

2 Determinants of the level of Interests
Bodi Kane Marcus Ch 5 Determinants of the level of Interests Real and Nominal rates of Interest The equilibrium Real Rate of Interest The equilibrium Nominal Rate of Interest Taxes and Real Rate of Interest more…

3 Real vs. Nominal Rates R = r + i or r = R - i
Bodi Kane Marcus Ch 5 Real vs. Nominal Rates Fisher effect: Approximation nominal rate = real rate + inflation premium R = r + i or r = R - i Example r = 3%, i = 6% R = 9% = 3% + 6% or 3% = 9% - 6% Fisher effect: Exact r = (R - i) / (1 + i) 2.83% = (9%-6%) / (1.06) Empirical Relationship: Inflation and interest rates move closely together

4 Factors Influencing Rates
Bodi Kane Marcus Ch 5 Factors Influencing Rates Supply Households Demand Businesses Government’s Net Supply and/or Demand Federal Reserve Actions

5 The equilibrium Real Rate of Interest
Bodi Kane Marcus Ch 5 Q0 Q1 r0 r1 Funds Interest Rates Supply Demand Pergeseran kurva Demand ke kanan dapat terjadi karena pemerintah menerapkan budget deficit  permintaan akan uang meningkat  interest rate naik

6 Risk and Risks Premium Holding Period Returns
Bodi Kane Marcus Ch 5 Risk and Risks Premium Holding Period Returns Expected Return and Standard Deviation Excess Returns and Risk Premiums more……

7 Rates of Return: Single Period
Bodi Kane Marcus Ch 5 Holding Period Returns Rates of Return: Single Period HPR = Holding Period Return P0 = Beginning price P1 = Ending price D1 = Dividend during period one

8 Rates of Return: Single Period Example
Bodi Kane Marcus Ch 5 Rates of Return: Single Period Example Ending Price ($) = 48 Beginning Price ($) = 40 Dividend ($) = 2 HPR = ( )/ (40) = 25%

9 Characteristics of Probability Distributions
Bodi Kane Marcus Ch 5 Characteristics of Probability Distributions 1) Mean: most likely value 2) Variance or standard deviation 3) Skewness * If a distribution is approximately normal, the distribution is described by characteristics 1 and 2

10 Characteristics of Probability Distributions
Bodi Kane Marcus Ch 5 Characteristics of Probability Distributions Mean: The simple mathematical average of a set of two or more numbers 2) Variance : A measure of the dispersion of a set of data points around their mean value.  Variance is a mathematical expectation of the average squared deviations from the mean. 3) Skewness : an asymmetry in the distribution of the data values

11 The Coefficient of Variation (CV)
Bodi Kane Marcus Ch 5 The Coefficient of Variation (CV) A statistical measure of the dispersion of data points in a data series around the mean. It is calculated as follows:  The coefficient of variation represents the ratio of the standard deviation to the mean. In the investing world, CV determine how much volatility (risk) in comparison to the amount of return you can expect from your investment. Source: Investopedia

12 Symmetric distribution
Bodi Kane Marcus Ch 5 Normal Distribution s.d. s.d. r Symmetric distribution

13 Measuring Mean: Scenario or Subjective Returns
Bodi Kane Marcus Ch 5 Measuring Mean: Scenario or Subjective Returns Subjective returns E ( r ) = p s p(s) = probability of a state r(s) = return if a state occurs 1 to s states

14 Numerical Example: Subjective or Scenario Distributions
Bodi Kane Marcus Ch 5 State Prob. of State r in State E(r) = (.1)(-.05) + (.2)(.05)...+ (.1)(.35) E(r) = .15

15 Measuring Variance or Dispersion of Returns
Bodi Kane Marcus Ch 5 Measuring Variance or Dispersion of Returns Subjective or Scenario Variance = s p ( ) [ r - E )] 2 Standard deviation = [variance]1/2 Using Our Example: Var =[(.1)( )2+(.2)( ) ( )2] Var= S.D.= [ ] 1/2 = .1095

16 Annual Holding Period Returns
Bodi Kane Marcus Ch 5 Annual Holding Period Returns Geom. Arith. Stan. Series Mean% Mean% Dev.% Large Stock Small Stock LongT Gov T-Bills Inflation

17 Expected Return and Standard Deviation
Bodi Kane Marcus Ch 5 Expected Return and Standard Deviation Spreadsheet 5.1

18 Teknis Penghitungan Standard Deviation of Excess Return Excess Return
Bodi Kane Marcus Ch 5 Expected Value Jumlahkan hasil perkalian probabilitas dengan HPR Standard Deviation of HPR Deviasi= HPR dikurangi mean Kuadratkan Deviasi Kalikan probabilitas dg Dev2 Jumlahkan (p* Dev2 ), kemudian pangkat-kan (0.5) atau diakar Excess Return HPR dikurangi RFR Squared Deviations (Dev2 ) Excess Return Excess Return dikurangi risk premium, kemudian dikuadratkan Standard Deviation of Excess Return Kalikan probabilitas dg Dev2 Excess Return

19 Expected Return and Standard Deviation
Bodi Kane Marcus Ch 5 Expected Return and Standard Deviation Problem 5-7 page 151

20 Excess Returns and Risk Premiums
Bodi Kane Marcus Ch 5 Excess Returns and Risk Premiums Excess Returns : Returns in excess of the risk-free rate or in excess of a market measure, such as an index fund. When you have excess returns you are making more money than if you put your money into an index fund like the Dow Jones Industrial Average (DJIA). Risk Premiums : The return in excess of the risk-free rate of return that an investment is expected to yield.  An asset's risk premium is a form of compensation for investors who tolerate the extra risk - compared to that of a risk-free asset - in a given investment. Source: Investopedia

21 Time Series Analysis of Past Rates of Return
Bodi Kane Marcus Ch 5 Time Series Analysis of Past Rates of Return Time Series versus Scenario Analysis Expected Returns and the arithmetic Average The Geometric (Time Weighted) Average Return The Reward to Volatility (Sharpe) Ratio

22 Time Series Analysis of Past Rates of Return
Bodi Kane Marcus Ch 5 Time Series Analysis of Past Rates of Return Time Series versus Scenario Analysis Time Series Analysis useful to see how a given asset, security or economic variable changes over time or how it changes compared to other variables over the same time period Scenario Analysis: The process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors that would affect security values, such as changes in the interest rate. Source: Investopedia

23 Time Series Analysis of Past Rates of Return
the arithmetic mean of a stock's closing price = $ / 5 = $14.80. Bodi Kane Marcus Ch 5 Time Series Analysis of Past Rates of Return The arithmetic Average: A mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series. Source: Investopedia Day 1 2 3 4 5 Sum Closing Price $14.50 $14.80 $15.20 $14.00 $15.50 $74.00 The arithmetic mean of a stock's closing price = $ / 5 = $14.80.

24 Time Series Analysis of Past Rates of Return
Bodi Kane Marcus Ch 5 Time Series Analysis of Past Rates of Return The Geometric (Time Weighted) Average Return: The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.  The Geometric = {(1+ r1)*(1+r2)*…*(1+rn)} 1/n -1 Average Return more……

25 Illustration Geometric Mean
Year Return 1 0.15 2 0.20 3 -0.20 Geometric Mean [(1.15) x(1.20) x (0.80)]1/3 – 1 = (1.104) 1/3 -1 = = 3.353%

26 Time Series Analysis of Past Rates of Return
Bodi Kane Marcus Ch 5 Time Series Analysis of Past Rates of Return The Reward to Volatility (Sharpe) Ratio: A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance.  The Sharpe ratio is calculated by subtracting the risk-free rate  from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns Source: Investopedia

27 The Normal Distribution
Bodi Kane Marcus Ch 5 The Normal Distribution Problem 5.6/ CFA Problem/p.153 Jawaban: Probabilitas perekonomian dalam keadaan neutral dan saham pada kondisi kinerja poor= 0.15

28 Deviations from Normality
Bodi Kane Marcus Ch 5 Deviations from Normality Positively skewed Negatively skewed

29 The Historical Record of Returns on Equities and Long Term Bonds
Bodi Kane Marcus Ch 5 The Historical Record of Returns on Equities and Long Term Bonds Average Returns and Standard Deviations Other statistics of Risky Portfolios Sharpe Ratios Serial Correlation Skewness and Kurtosis Estimates of Historical Risk Premiums A Global View of the Historical Record more……

30 Average Returns and Standard Deviation
Bodi Kane Marcus Ch 5 Average Returns and Standard Deviation

31 Measurement of Risk with non Normal Distributions
Bodi Kane Marcus Ch 5 Measurement of Risk with non Normal Distributions Value at Risk (VaR) : A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities. Conditional Tail Expectation (CTE) : an important actuarial risk measure and a useful tool in financial risk assessment. Lower Partial Standard Deviation (LPSD) : Compute expected lower partial moments for normal asset returns

32 Lower Partial Standard Deviation (LPSD)
Bodi Kane Marcus Ch 5 Measure of risk non normal distributions The LPSD for the large and small stock portfolios are not very different from value from the normal distributions because the skews are similar to those from the normal (see Table 5.5) Large US Stocks Small US Stocks Lower Partial Standard Deviation (%) History Normal LPSD for 25 year HPR 4.34 4.23 7.09 7.14 LPSD for 1 year HPR 21.71 21.16 35.45 35.72 Average 1 –year HPR 12.13 12.15 17.97 17.95

33 Annual Holding Period Risk Premiums and Real Returns
Bodi Kane Marcus Ch 5 Annual Holding Period Risk Premiums and Real Returns Risk Real Series Premiums% Returns% Lg Stk Sm Stk LT Gov T-Bills Inflation 0.6

Download ppt "Learning about Return and Risk from The Historical Record"

Similar presentations

Holding Period Return.

Holding Period Return.
Introduction The relationship between risk and return is fundamental to finance theory You can invest very safely in a bank or in Treasury bills. Why.

Introduction The relationship between risk and return is fundamental to finance theory You can invest very safely in a bank or in Treasury bills. Why.
Risk, Return, and the Historical Record

Risk, Return, and the Historical Record
Chapter 2 RISK AND RETURN BASICS. 1.2 Investments Chapter 2 Chapter 2 Questions What are the sources of investment returns? How can returns be measured?

Chapter 2 RISK AND RETURN BASICS. 1.2 Investments Chapter 2 Chapter 2 Questions What are the sources of investment returns? How can returns be measured?
1 Risk, Returns, and Risk Aversion Return and Risk Measures Real versus Nominal Rates EAR versus APR Holding Period Returns Excess Return and Risk Premium.

1 Risk, Returns, and Risk Aversion Return and Risk Measures Real versus Nominal Rates EAR versus APR Holding Period Returns Excess Return and Risk Premium.
Risk and Return – Introduction Chapter 9 For 9.220,

Risk and Return – Introduction Chapter 9 For 9.220,
History of Interest Rates and Risk Premiums Chapter 5.

History of Interest Rates and Risk Premiums Chapter 5.
Risk and Return: Past and Prologue CHAPTER 5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Holding Period Return.

Risk and Return: Past and Prologue CHAPTER 5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Holding Period Return.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Risk and Return: Past and Prologue CHAPTER 5.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Risk and Return: Past and Prologue CHAPTER 5.
Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. 1 A Brief History of Risk and Return.

Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. 1 A Brief History of Risk and Return.
Risk and Return: Past and Prologue

Risk and Return: Past and Prologue
1 Fin 2802, Spring 10 - Tang Chapter 5: Risk and Return Fina2802: Investments and Portfolio Analysis Spring, 2010 Dragon Tang Lecture 8 Risk and Return:

1 Fin 2802, Spring 10 - Tang Chapter 5: Risk and Return Fina2802: Investments and Portfolio Analysis Spring, 2010 Dragon Tang Lecture 8 Risk and Return:
Risk and Return Riccardo Colacito.

Risk and Return Riccardo Colacito.
Chapter 5 Risk and Return: Past and Prologue. Measuring Ex-Post (Past) Returns One period investment: regardless of the length of the period. Must be.

Chapter 5 Risk and Return: Past and Prologue. Measuring Ex-Post (Past) Returns One period investment: regardless of the length of the period. Must be.
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 6.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 6.
Fall-02 Investments Zvi Wiener tel: 02-588-3049 History of Interest Rates and.

Fall-02 Investments Zvi Wiener tel: History of Interest Rates and.
Chapter 2 RISK AND RETURN BASICS. Chapter 2 Questions What are the sources of investment returns? How can returns be measured? How can we compute returns.

Chapter 2 RISK AND RETURN BASICS. Chapter 2 Questions What are the sources of investment returns? How can returns be measured? How can we compute returns.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Risk and Return: Past and Prologue 5 Bodie, Kane, and Marcus.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Risk and Return: Past and Prologue 5 Bodie, Kane, and Marcus.
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
Measuring Risk and Return

Measuring Risk and Return

Similar presentations

Ads by Google