Podcast
Questions and Answers
What does HPY stand for in the context of investment?
What does HPY stand for in the context of investment?
- Home Price Yield
- Holding Period Yield (correct)
- Historical Price Yield
- High Price Yield
How is the HPY calculated based on the given information?
How is the HPY calculated based on the given information?
- HPY = (Final Value - Initial Value) / Initial Value (correct)
- HPY = (Initial Value - Final Value) / Initial Value
- HPY = Selling Price - Purchase Price
- HPY = Selling Price / Purchase Price
What is the HPY percentage calculated in the example?
What is the HPY percentage calculated in the example?
- 50%
- 75% (correct)
- 125%
- 100%
If the initial price was PHP 20, what was the gain per share after three years?
If the initial price was PHP 20, what was the gain per share after three years?
What is the formula to obtain the Annual HPY from the HPY?
What is the formula to obtain the Annual HPY from the HPY?
In the context of this investment scenario, what is the duration of the holding period?
In the context of this investment scenario, what is the duration of the holding period?
If the HPY is 75% over three years, what is the total return on an investment of PHP 100?
If the HPY is 75% over three years, what is the total return on an investment of PHP 100?
What does the range in risk assessment measure?
What does the range in risk assessment measure?
Which of the following is a measure of risk?
Which of the following is a measure of risk?
In the standard deviation formula, what does the variable 'k' represent?
In the standard deviation formula, what does the variable 'k' represent?
What is the purpose of sensitivity analysis in risk assessment?
What is the purpose of sensitivity analysis in risk assessment?
Which formula calculates the standard deviation of a portfolio?
Which formula calculates the standard deviation of a portfolio?
What does a higher Coefficient of Variation (CV) indicate?
What does a higher Coefficient of Variation (CV) indicate?
What is the first step in risk assessment as described?
What is the first step in risk assessment as described?
What is the relationship between standard deviation and risk?
What is the relationship between standard deviation and risk?
What adjustment is made to the Standard Deviation formula according to the provided content?
What adjustment is made to the Standard Deviation formula according to the provided content?
In which economic state does Asset 'C' yield its maximum return?
In which economic state does Asset 'C' yield its maximum return?
What is the range for Asset 'C' calculated from the economic states?
What is the range for Asset 'C' calculated from the economic states?
Which asset is considered riskier based on the provided data?
Which asset is considered riskier based on the provided data?
What is the expected return for Asset 'D' in a Stable economic state?
What is the expected return for Asset 'D' in a Stable economic state?
What is the purpose of the given formulas and examples?
What is the purpose of the given formulas and examples?
What is the return for Asset 'C' in the Decline economic state?
What is the return for Asset 'C' in the Decline economic state?
What does the abbreviation SD stand for in the context of finance?
What does the abbreviation SD stand for in the context of finance?
What does k represent in the context of the assets?
What does k represent in the context of the assets?
What does the Capital Asset Pricing Model (CAPM) incorporate that the Markowitz Portfolio Theory (MPT) does not?
What does the Capital Asset Pricing Model (CAPM) incorporate that the Markowitz Portfolio Theory (MPT) does not?
Which year was the Capital Asset Pricing Model (CAPM) developed?
Which year was the Capital Asset Pricing Model (CAPM) developed?
Arbitrage Pricing Theory (APT) is best described as a theory that:
Arbitrage Pricing Theory (APT) is best described as a theory that:
Who are the developers associated with the Capital Asset Pricing Model?
Who are the developers associated with the Capital Asset Pricing Model?
Which of the following theories primarily focuses on the implications of risk and return?
Which of the following theories primarily focuses on the implications of risk and return?
What is the primary objective of the Markowitz Portfolio Theory (MPT)?
What is the primary objective of the Markowitz Portfolio Theory (MPT)?
In which publication can the discussed theories around portfolio management be found?
In which publication can the discussed theories around portfolio management be found?
Which of the following statements is accurate regarding the relationship between CAPM and MPT?
Which of the following statements is accurate regarding the relationship between CAPM and MPT?
Which of the following assumptions of CAPM states that investors can acquire any amount of funds?
Which of the following assumptions of CAPM states that investors can acquire any amount of funds?
What does the assumption that 'all assets are perfectly divisible' imply?
What does the assumption that 'all assets are perfectly divisible' imply?
What is indicated by investors using identical time horizons in their investment assessments?
What is indicated by investors using identical time horizons in their investment assessments?
Which assumption suggests that all investors will project the same 'probability distributions for rates of return'?
Which assumption suggests that all investors will project the same 'probability distributions for rates of return'?
What does it mean when it is stated that investments are free from taxes and transaction costs?
What does it mean when it is stated that investments are free from taxes and transaction costs?
Which of the following best describes market efficiency in the context of CAPM?
Which of the following best describes market efficiency in the context of CAPM?
How do investors assess investment opportunities according to CAPM assumptions?
How do investors assess investment opportunities according to CAPM assumptions?
What does the assumption about 'identical time horizons' imply for investors?
What does the assumption about 'identical time horizons' imply for investors?
What does a change in inflation indicate in the context of finance?
What does a change in inflation indicate in the context of finance?
Which factor is affected by risk aversion according to CAPM principles?
Which factor is affected by risk aversion according to CAPM principles?
In CAPM, what happens when risk aversion increases?
In CAPM, what happens when risk aversion increases?
What is one key assumption of the Capital Asset Pricing Model (CAPM)?
What is one key assumption of the Capital Asset Pricing Model (CAPM)?
How does CAPM relate to the required return on an asset?
How does CAPM relate to the required return on an asset?
What can be concluded about investor behavior in response to rising inflation?
What can be concluded about investor behavior in response to rising inflation?
What is the impact of an increase in required return on investment decisions?
What is the impact of an increase in required return on investment decisions?
According to CAPM, what directly influences an investor's required return?
According to CAPM, what directly influences an investor's required return?
Flashcards
Holding Period Yield (HPY)
Holding Period Yield (HPY)
The total return on an investment over a specific period, expressed as a percentage.
Annual HPY
Annual HPY
The holding period yield (HPY) expressed on an annual basis.
Initial Investment Price
Initial Investment Price
The price paid for a share or investment at the beginning.
Selling Price
Selling Price
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HPY Calculation
HPY Calculation
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Investment Return
Investment Return
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Investment Period
Investment Period
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Investment Appreciation
Investment Appreciation
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Risk Assessment
Risk Assessment
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Sensitivity Analysis
Sensitivity Analysis
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Probability Distribution
Probability Distribution
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Risk Measurement: Standard Deviation (SD)
Risk Measurement: Standard Deviation (SD)
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Risk Measurement: Coefficient of Variation (CV)
Risk Measurement: Coefficient of Variation (CV)
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Portfolio Standard Deviation
Portfolio Standard Deviation
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Standard Deviation Formula
Standard Deviation Formula
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Coefficient of Variation Formula
Coefficient of Variation Formula
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Range calculation
Range calculation
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Standard Deviation (SD)
Standard Deviation (SD)
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Coefficient of Variation (CV)
Coefficient of Variation (CV)
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Asset 'C' Range
Asset 'C' Range
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Asset 'D' Range
Asset 'D' Range
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Asset Risk
Asset Risk
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Economic State and Probability
Economic State and Probability
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Asset Return 'C'(kC)
Asset Return 'C'(kC)
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Asset Return 'D'(kD)
Asset Return 'D'(kD)
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Riskier Asset
Riskier Asset
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Portfolio Theory
Portfolio Theory
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Markowitz Portfolio Theory (MPT)
Markowitz Portfolio Theory (MPT)
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Capital Asset Pricing Model (CAPM)
Capital Asset Pricing Model (CAPM)
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Arbitrage Pricing Theory (APT)
Arbitrage Pricing Theory (APT)
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Risk-Free Asset
Risk-Free Asset
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Sharpe (1964), Lintner (1965), and Mossin (1966)
Sharpe (1964), Lintner (1965), and Mossin (1966)
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What is the relationship between MPT and CAPM?
What is the relationship between MPT and CAPM?
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What is the importance of understanding portfolio theory?
What is the importance of understanding portfolio theory?
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CAPM Assumptions
CAPM Assumptions
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Limitless Funds
Limitless Funds
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Perfectly Divisible Assets
Perfectly Divisible Assets
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Identical Time Horizons
Identical Time Horizons
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Risk Assessment with Expected Value & Standard Deviation
Risk Assessment with Expected Value & Standard Deviation
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Tax & Transaction Costs
Tax & Transaction Costs
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Same Probability Distributions
Same Probability Distributions
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Market Efficiency
Market Efficiency
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CAPM
CAPM
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Risk-Free Rate
Risk-Free Rate
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Beta
Beta
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Market Risk Premium
Market Risk Premium
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Inflation
Inflation
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Risk-Aversion
Risk-Aversion
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Required Return
Required Return
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Study Notes
Return
- Return is the total gain or loss on an investment over a given period.
- Formula for Holding Period Return (HPR): (Ending Value + Cash Flows) / Beginning Value
- Formula for Holding Period Yield (HPY): HPR - 1
- Annual HPY = (Annual HPR)^ (1/n) - 1, where n is the investment period in years
Risk
- Risk refers to the uncertainty that an investment will earn its expected rate of return.
Risk Assessment: Range
- Formula: Range = |Optimistic Case – Pessimistic Case|
Risk Measurement: Standard Deviation (SD)
- Formula: σ = √Σ [(kj - k̄)² * Pr(kj)] or σ = √Σ [( kj – k̄)² / (n – 1)]
- Note: Values may be adjusted to determine portfolio SD
Risk Measurement: Coefficient of Variation (CV)
- Formula: CV = σ / k̄
- Note: Formulae may be adapted to determine the portfolio SD. k̄ and kp are used in calculation.*
Integrated Example: An Asset's Risk
- Examples given to determine range, SD, & CV of assets (C and D). Data for each asset was provided.
- Asset C's riskier than Asset D based on the computed risk measures.
Integrated Example: A Portfolio's Risk
- Examples given to calculate portfolio's standard deviation (SD)
- Diversification reduces risk.
Correlation Coefficient
- Formula: r = COV(kᵢ, kⱼ) / (σᵢ * σⱼ)
- Note:* cov= Σ(kᵢ-k̄ᵢ)(kⱼ-k̄ⱼ)Pᵢⱼ
- Examples given to illustrate how the correlation coefficient is calculated. Data for each asset was provided.
CAPM
- Developed by Sharpe, Lintner, and Mossin.
- Accounts for risk-free asset (RF).
- Ties systematic risk and return of assets. Uses past data. Assumes efficient markets.
- Attributes of an efficient market:
- numerous investors
- identical information, & assumptions about securities.
- No limitations (taxes, transaction costs)
- Sensible investors
- Kinds of Risk:
- Nondiversifiable (systematic risk): Beta Coefficient
- Diversifiable (unsystematic risk)
CAPM Formula
- Formula: kᵢ = RF + [βᵢ * (kₘ - RF)]
- where: RF = risk-free rate
- káµ¢ = required return
- βᵢ = beta coefficient
- kₘ = market return
CAPM Example
- Examples are given in the slides to show how to calculate required return
CAPM Critiques
- Unclear proxy for risk-free rate (RF)
- Unclear market return (km)
- Changes in beta of assets over time.
Addressing CAPM Critiques
- Use portfolio beta (βp) instead of individual security beta (βi)
- Formula: kₚ= RF + [βₚ * (Km - RF)]
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