Finance 380 Midterm Note

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Lecture 1 -­‐ Arithmetic Average 1. Ignores compounding; 2. Does not represent an equivalent, single quarterly rate for the year; 3. Is the best forecast of performance for the next quarter without information beyond the historical sample. -­‐ Geometric Average 1. Also called a time-­‐weighted average return-­‐ignoring the quarter-­‐to-­‐quarter variation in funds under management; 2. Mutual funds are required to publish this as a measure of past performance. -­‐ Dollar-­‐weight Return 1. Similar to a capital budget problem 2. Accounting for varying amounts of capital under management form quarter to quarter 3. Less than time-­‐weighted return of 7.19% -­‐ Risk free assets: an asset with a certain rate of return (often taken to be short term T-­‐bills) -­‐ Scenario analysis: l Determine a set of relevant scenarios and associated investment outcomes and assigns probability to each l l -­‐ Compute mean return and variance However, sometimes it is hard to assign probabilities

Time series analysis: l l Use historical data, treat each observation as equally likely Compute mean and variance

-­‐ -­‐

Normal distribution, ri~N(E(ri), Oi) Two special properties:

l

The return on…...

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