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  • 3.2 Measures of Return and Risk - Topic 3 - Equity - Finance Essentials - Edx

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    This document discusses measures of return and risk in investing. It defines risk, or volatility, as the dispersion of returns for a security or market index, which can be measured using statistics like standard deviation and variance. Higher volatility signifies a riskier security. The document provides an example comparing the standard deviation and returns of different asset classes over time to demonstrate how risk and return change depending on the year. It notes that depending on the year, bonds can offer higher average returns at lower risk than equities.

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    3.2 Measures of return and risk _ Topic 3 - Equity _ Finance Essentials _ edX

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    This document discusses measures of return and risk in investing. It defines risk, or volatility, as the dispersion of returns for a security or market index, which can be measured using statistics like standard deviation and variance. Higher volatility signifies a riskier security. The document provides an example comparing the standard deviation and returns of different asset classes over time to demonstrate how risk and return change depending on the year. It notes that depending on the year, bonds can offer higher average returns at lower risk than equities.

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    3 views4 pages

    3.2 Measures of Return and Risk - Topic 3 - Equity - Finance Essentials - Edx

    Uploaded by

    semester6 irnatl
    This document discusses measures of return and risk in investing. It defines risk, or volatility, as the dispersion of returns for a security or market index, which can be measured using statistics like standard deviation and variance. Higher volatility signifies a riskier security. The document provides an example comparing the standard deviation and returns of different asset classes over time to demonstrate how risk and return change depending on the year. It notes that depending on the year, bonds can offer higher average returns at lower risk than equities.

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    © All Rights Reserved
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    3/3/23, 5:41 PM 3.

    2 Measures of return and risk | Topic 3 - Equity | Finance Essentials | edX

    ImperialBusinessX ICBS002 Help irosa_13


    Finance Essentials
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    Course / Topic 3 - Equity / 3.2 Measures of return and risk


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    3/3/23, 5:41 PM 3.2 Measures of return and risk | Topic 3 - Equity | Finance Essentials | edX

    Summary

    In this section, you develop your understanding of risk in the context of investing.

    Guide time: 25 mins

    TOPIC THREE – EQUITY

    3.2 Measures of return and risk


    The popular perception of financial markets is that they are driven by the opposing forces of
    fear and greed. Being academics, we prefer the terms risk and return, but it amounts to the
    same thing. Let me explain more.


     mean reversion.

     2:14 / 2:17  1.0x    

    Now let’s look a little more at the concept of risk. In finance, risk or volatility is a measure of
    the dispersion of returns for a given security or market index. It can be measured using
    statistics (the standard deviation or variance of the returns from a security or a market
    index). Higher volatility normally signifies a riskier security. Let me provide an example.

    Video
    return of -16.69%.
    In practice, the
    precise way of
    calculating the
    holding period
    return is very
    important
    because it is
    important to ask
    whether the return
    of a share includes
    or excludes
    dividend
    payments. We are


    interested in total
    returns which
    include the capital
    gains and the
    dividend
    yields, and we
    always must make
    sure that the return
    that we use
    includes these two
    t
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    3/3/23, 5:41 PM 3.2 Measures of return and risk | Topic 3 - Equity | Finance Essentials | edX

    Previous Next
    components.
     components.

     4:28 / 4:28

     1.0x    

    I now want to demonstrate these ideas more concretely. To do this, I have designed another
    bespoke interaction, which I explain in the next presentation.


    like Small Caps, sometimes exhibit lower returns than

    bonds, like during 2008!

     1:11 / 1:11  1.0x    

    For a more visual demonstration of these ideas, please look at the next activity.

    Activity

    Using the slider, try changing the year and observe how the average risk–return profile
    of the asset classes in the graph move around. You might be surprised to know that,
    All Rights Reserved
    depending on the year, bonds can offer higher average returns at a lower risk than
    equities.

    edX
    Note: Risk is captured by the annualised standard deviation calculated over three
    years of daily returns. The average return is calculated over the same horizon and
    annualised arithmetically.

    About Spend some time interacting with this resource to further your understanding.

    Affiliates
    edX for Business
    Year

    Open2012
    edX
    Careers
    News
    Legal
    Standard
    Return (%)
    Deviation (%)

    US Corportate
    6.44 7.23

    Terms of Service & Honor Code


    Bonds

    Privacy Policy US Small Caps 35.34 9.01

    Accessibility Policy
    US Large Caps 30.55 1.5

    Trademark Policy US 10y T-notes 8.65 7.64

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    3/3/23, 5:41 PM 3.2 Measures of return and risk | Topic 3 - Equity | Finance Essentials | edX

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    and Return
    Do Not Sell My Personal Information
    25

    Connect
    20

    15

    Blog 10

    Contact Us
    Return %

    Help Center
    5

    Security 5 10 15 20 25 30 35 40

    Media Kit -5

    -10

    -15
    Standard Deviation %

    © 2023 edX LLC. All rights reserved.


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