An introduction summary notes of some of the introductory topics covered in finance I. This is detailed document filled with colour to keep the motivation going.
financial markets provide us with information about returns that are
required for various levels of risk
the the the larger the compensation for blaring
greater risk return investors require as risk
this means that
higher risk bears higher uncertainty Expected Return
Investment return and risk measures are calculated Expected return is the
weighted average of the possible
standard deviation but this
through variance and , returns from an investment. Reflects the return
you
calculations depend on whether or not there is historical data or can expect to recleve from investing in that asset .
It
forecast data. Return is calculated as
percentage over one
year estimates theOtturn
given the possible outcomes and
total holding period return on investment contains : their associated probabilities
·
Capital gains or losses return on shareholders investment Expected return =
[Rasset = (PiccRi) =
(Pix Ril
Investment Income
·
Y arlance and standard deviation measure risk
Capital appreciation arising from
as
price changes of an assit
Y
over investment or
holding period risk refers 10 the
degree of
uncertainty or
variability In
year
Income (dividend yield / return) this is the income investors recieve Or
year returns on Investment. Variance and standard
from assets either as dividends or interest recieved deviation measure risk.
They measure how much
on
average the
payoff deviates/moves away from
Capital appreciation Income expected value . The
greater the standard deviation and
I
P1-Po CFo case flow
RCA Ri The difference
from dividend the
higher the risk. greater the
=
=
Po Po variance
price paid
for an asset at
between expected value the the risk
& time 2000
payoff and ,
greater
price at later point
Standard deviation measures how much an asset
therefore the total
holding period is the sum of capital appellation return varies from its
average return over a sit
and income components of return period of time
Pot average of the possible
RT = RCA + Ri = Pipo i Po mean is the expected return
returns from Investmen
an
measure of risk for variables that are
normally
Historical data
. Measure of
distributed
·
use the actual returns
uncertainty surrounding an
Calculating variance and standard deviation : to calculate mean
divide the total of all
return our come
· low standard deviation means numbers
Standard deviation are closer to
average.
annual returns
by Of yes
no ·
high standard deviation means that
n
(Ri-R) · calculate actual -
expected the numbers are more spread out
Variance A normal distribution comes with
A return .
squared deviations
a
perfectly
(n -i) · calculate
symmetrical shape
and sum them up.
historical variance = S2
H -
A
a confidence interval displays the probability that
forecast data parameter will fall between a pair of values around
the mean
evaluate an asset for investment
When Investors ,
they are interest in
future returns weighted by its assodated probability
.
The average of projected returns
from an investment where each of these returns is weighted by its associated probability
Calculating expected return
multiply each projected return with associated probability and
n
get sum of all the products
N
E[R) =
PiRi
i = 1
Variance =
i =1
Pi(Ri-E(r))
,
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