MKT 600 Lecture Notes - Lecture 6: Preferred Stock, Call Money, Survivorship Bias
16 Jun 2015
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Chapter 1 a history of risk and return (geometric, arithmetic, yields, single security variance/standard deviation, forward returns (blumes)) Arithmetic return: you simply sum the returns and divide by the number of returns, this does not account for the effects of compounding. 5 year performance for stock a was 24%, 6%, -8%, 19%, 15%, stock a: ra. = [(. 24 . 112)2 + (. 06 . 112)2 + ( . 08 . 112)2 + (. 19 . 112)2 + (. 15 . 112)2]/(5-1) = 0. 015870 standard deviation = (0. 015870) As an investor, the more important return is geometric return. If stock went from to in one year and then from to the next, the arithmetic would be 25%, geometric is 0%. Arithmetic return (6 years) = (. 29 + . 11 + . 18 . 06 . 19 + . 34) / 6 = . 1117. Geometric return (6 years) = [(1 + . 18)(1 + . 11)(1 + . 18)(1 . 06)(1 . 19)(1 + . 34)](1/6) 1 = . 0950.
