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44 Cards in this Set
- Front
- Back
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What are the two ways historical rates of return can be represented?
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- Dollar
- Percentage |
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What is the gain or loss from an investment called?
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Return on investment
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What are the two components that make up dollar returns?
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- Income component
- Capital gain/loss component |
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Income Component
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Receive cash directly while you own an investment
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Capital gain/loss component
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The value of your asset changes
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Total dollar return equation
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Total dollar return = dividend income + capital gain/loss
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What does it mean to not 'realise' the gain?
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You don't actually sell your share at the end of the year
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What question does percentage return answer?
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How much do we get for each dollar we invest?
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Total rate of return equation (percentage)
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Total rate of return = dividend yield + capital gains yield
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Dividend Yield
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Income
--------- Start Price |
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Capital Gains Yield
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(End Price - Start Price)
---------------------------- Start Price |
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Risk Premium
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The excess return of an asset; reward earned for bearing risk
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What are the characteristics of US T-bills?
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- Default free
- Virtually risk-free |
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What is the rate of return on a T-Bill called?
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Risk-free rate of return
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What is the difference between the return on risky assets and the US T-Bill's risk-free rate of return?
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Risk Premium
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Basic Equation for Expected Return on Stock A
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E (R of Stock A) = Rf (risk-free rate or return) + Risk Premium (for bearing stock A)
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Frequency Distribution
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The number of times the annual return falls within a certain percentage range
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What do Variance and Standard Deviation represent?
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The spread of values and the volatility/risk
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The higher the Standard Deviation or Variance the ______________ the risk and the ______________ the expected return
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Higher, higher
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Variance
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The average squared difference between the actual return and the average return
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Variance equation
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(sum of squared deviations)
--------------------------------- (number of operations - 1) |
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How to calculate the Historical Variance and Standard Deviation
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1. Calculate average return by adding all actual averages together and dividing by number of years
2. Find the deviation each actual return has from the average return (Actual return - mean return) 3. Square deviations found in (2) 4. Add squared deviations from (3) 5. Divide sum of the squared deviations from (4) by the number of observations - 1, to get variance 6. Square root (5) to get standard deviation |
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Normal Distribution
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A symmetrical, bell-shaped frequency distribution that is completely defined by its average and standard deviation
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How much of the data is enclosed in 68% of a normal distribution?
95%? 99%? |
68% - 1 standard deviation either side of mean
95% - 2 standard deviations either side of mean 99% - 3 standard deviations either side of mean |
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What are the two different averages we can look at?
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- Arithmetic Average
- Geometric average |
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Arithmetic Mean
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The return earned in an average year over a multi-year period.
The simple average of returns |
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How do you calculate arithmetic mean?
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- Add averages together
- Divide by number of observations |
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Geometric Average
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The average compound return earned per year over a multi-year period
The constant single rate of return that if compounded over multiple holding periods gives the true rate of growth in wealth |
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How do you calculate geometric average?
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Solve for g:
[(1 + R1) x (1 + R2) x ... x (1 + RT)]^ (1/T) - 1 = g |
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When do you use arithmetic mean?
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- If you know true arithmetic average return
- Forecasting up to a decade or so into future |
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When do you use geometric mean?
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- Forecasting a very long period into the future, covering many decades
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Efficient Capital Market
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Market in which security prices reflect available information (public news)
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What makes a market more efficient?
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When many investors research and trade stocks
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What are the three ways a share price can react to new information?
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- Efficient Market Reaction
- Delayed Reaction - Over-reaction and Correction |
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Efficient Market Reaction
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- Price instantaneously adjusts to and fully reflects new information
- No tendency for subsequent increase/decrease |
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Delayed Reaction
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- Price partially adjusts to new information
- Several days elapse before price fully reflects new information |
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Over-reaction and Correction
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- Price over adjusts to new information
- Overshoots new price and subsequently corrects |
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What are the three ways market efficiency can be defined, according to Fama (1970)?
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- Weak-form efficiency
- Semi-strong form efficiency - Strong-form efficiency |
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Weak-form efficiency
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ALL MARKET DATA
- No excess returns made from technical analysis - Data often supports this - Current price of a share reflects its own past prices |
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Semi-strong efficiency
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ALL PUBLIC DATA
- No excess returns made from fundamental or technical analysis - Apparently mispriced share information is already reflected in share price |
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Strong-form efficiency
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ALL DATA (all info of every kind)
- No excess returns made from any analysis - Data often rejects this) - Apparently NO such things as insider trading |
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What are the main NZ Securities regulations/acts?
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- Securities Act (1978) + Securities regulations (1983)
- Define securities and set out legal requirements |
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What does the Securities Markets Act (1988) do?
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- defines insider trading, tipping, market manipulation
- prohibits misleading or deceptive conduct - requires advisors to disclose experience etc |
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Financial Reporting Act 1993
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Requires issuers to file financial statements
Gives legal force to accounting standards approved by Accounting Standard review Board |
