Essentials of Investments Chapter 5
1. Holding-Period Return (HPR): rate of return over a given investment period 2. Arithmetic Average: the sum of returns
of each period divided by the number of periods
3. Geometric Average: the single per-period return that gives the same cumulative performance as the sequence of actual
returns
4. Scenario Analysis: process of devising a list of possible economic scenarios and specifying the likelihood of each one, as
well as the HPR that will be realized in each case
5. Probability Distribution: list of possible outcomes with associated probabilities (scen. anal.)
6. Expected Return: the mean value of the distribution of HPR
7. Variance: the expected value of the squared deviation from the mean
8. Standard Deviation: the square root of the variance
9. Value at Risk (VaR): measure of downside risk. the worst loss that will be suffered with a given probability, often 5%.
How many dollars can I expect to lose on my portfolio in a given time period at a given level of probability?
10. Left Skewed: tail is to the left, mean is on the left, Median is on the right side of
the mean
11. Right Skewed: tail is to the right. Median is on the left side of the mean
12. Kurtosis: measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. indicates
likelihood of extreme outcomes 13. Skew: measure of the asymmetry of a probability distribution
14. Risk-free rate: the rate of return that can be earned with certainty
15. Risk Premium: the difference between the expected return of a risky asset and the risk-free rate
16. Excess Return: rate of return in excess of the risk-free rate
17. Risk Aversion: reluctance to accept risk. determines how much risk a person will take on for given extra return
18. Risk averse: prefers to receive expected value of gamble (for sure) to the gamble itself. requires compensation (higher
expected return) for risk taking
19. Risk neutral: cares only about expected return, level of risk irrelevant
20. Sharpe (reward to volatility) ratio: ratio of portfolio risk premium to standard deviation. Commonly used to rank
portfolios in terms of their risk-return trade-off. 21. Mean-Variance Analysis: ranking portfolios by their Sharpe ratios
22. inflation rate: the rate at which prices are rising, measured as the rate of increase of the CPI.
23. Nominal Interest Rate: the interest rate in terms of nominal (not adjusted for purchasing power) dollars
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Essentials of Investments Chapter 5
1. Holding-Period Return (HPR): rate of return over a given investment period 2. Arithmetic Average: the sum of returns
of each period divided by the number of periods
3. Geometric Average: the single per-period return that gives the same cumulative performance as the sequence of actual
returns
4. Scenario Analysis: process of devising a list of possible economic scenarios and specifying the likelihood of each one, as
well as the HPR that will be realized in each case
5. Probability Distribution: list of possible outcomes with associated probabilities (scen. anal.)
6. Expected Return: the mean value of the distribution of HPR
7. Variance: the expected value of the squared deviation from the mean
8. Standard Deviation: the square root of the variance
9. Value at Risk (VaR): measure of downside risk. the worst loss that will be suffered with a given probability, often 5%.
How many dollars can I expect to lose on my portfolio in a given time period at a given level of probability?
10. Left Skewed: tail is to the left, mean is on the left, Median is on the right side of
the mean
11. Right Skewed: tail is to the right. Median is on the left side of the mean
12. Kurtosis: measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. indicates
likelihood of extreme outcomes 13. Skew: measure of the asymmetry of a probability distribution
14. Risk-free rate: the rate of return that can be earned with certainty
15. Risk Premium: the difference between the expected return of a risky asset and the risk-free rate
16. Excess Return: rate of return in excess of the risk-free rate
17. Risk Aversion: reluctance to accept risk. determines how much risk a person will take on for given extra return
18. Risk averse: prefers to receive expected value of gamble (for sure) to the gamble itself. requires compensation (higher
expected return) for risk taking
19. Risk neutral: cares only about expected return, level of risk irrelevant
20. Sharpe (reward to volatility) ratio: ratio of portfolio risk premium to standard deviation. Commonly used to rank
portfolios in terms of their risk-return trade-off. 21. Mean-Variance Analysis: ranking portfolios by their Sharpe ratios
22. inflation rate: the rate at which prices are rising, measured as the rate of increase of the CPI.
23. Nominal Interest Rate: the interest rate in terms of nominal (not adjusted for purchasing power) dollars
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Essentials of Investments Chapter 5
