CHAPTER TWO UNDERSTANDING RISK AND RETURN Practical Investment Management Robert A Strong
UNDERSTANDING RISK AND RETURN CHAPTER TWO Practical Investment Management Robert A. Strong
Introduction a dollar today is worth more than a dollar tomorrow a safe dollar is worth more than a risky dollar. People have different degrees of risk aversion. Some are more willing to take a chance than others A tradeoff exists between risk and return Strong C2-Understanding Risk and Return 2-2
2 - 2 Strong C2 – Understanding Risk and Return Introduction A dollar today is worth more than a dollar tomorrow. A safe dollar is worth more than a risky dollar. People have different degrees of risk aversion. Some are more willing to take a chance than others. A tradeoff exists between risk and return
Holding Period Return The simplest measure of return is the holding period return Ending Beginning Holding value value Income period return Beginning value Strong C2-Understanding Risk and Return 2-3
2 - 3 Strong C2 – Understanding Risk and Return Holding period = return Ending Beginning value value Income Beginning value _ + Holding Period Return The simplest measure of return is the holding period return
Holding period return Example: Buy 100 shares Dividend of Sell the shares at $25 per share $0.10 per share at $30 per share Time $30$25+$0.10 Holding period return =20.4% $25 Strong C2-Understanding Risk and Return 2-4
2 - 4 Strong C2 – Understanding Risk and Return Buy 100 shares at $25 per share Time Sell the shares at $30 per share Dividend of $0.10 per share Example : Holding period return = = 20.4% $30 - $25 + $0.10 $25 Holding Period Return
Holding period return Holding period return is independent of the passage of time When comparing investments, the periods should all be of the same length When there are stock splits or other corporate actions, care should be taken to ensure that the correct value is used for calculating the holding period return Strong C2-Understanding Risk and Return 2-5
2 - 5 Strong C2 – Understanding Risk and Return Holding period return is independent of the passage of time. When comparing investments, the periods should all be of the same length. When there are stock splits or other corporate actions, care should be taken to ensure that the correct value is used for calculating the holding period return. Holding Period Return