Annual

Year Value of investment Dividend return

0 1000 Annual return = cash retur
1 2000 0 100% Annual return = 0 + (year-e
2 1000 0 -50%
Sum 50%
Average =50/2
25

15.4%, 26.75%, - 3.26%, 42.44%, 28.65

15.4
($15,448.96) 26.75
-3.26
42.44
12,700, 9,450, 21,750, 18,750, and 25,600 28.65
22.6
19.8
17.50% 30.25

22.82875
Annual return = cash return plus value appreciation
Annual return = 0 + (year-end value-year bgn value)/Year bgn Value plus value appreciation
= 0 +(2000-1000)/1000

3.26%, 42.44%, 28.65%, 22.6%, 19.8%, and 30.25%.

 Year Return k (1+k) Future value of Tk 1 after 7 years at 19.96%
1 20 0.2 1.2
2 22 0.22 1.22
3 18 0.18 1.18
4 26 0.26 1.26
5 21 0.21 1.21
6 16 0.16 1.16
7 17 0.17 1.17
Sum 140 19.75986
Average 20 Arithmetic average
Product 3.574562 Geometric Return = ' ((Product(1+ki))^(1/n))-1
Geometric return 0.199587 19.96%

Average Return 20

Practice problem
Year Return k 1+k
1 16 0.16 1.16
2 27 0.27 1.27
3 33 0.33 1.33
4 -2 (0.02) 0.98
5 21 0.21 1.21
6 42 0.42 1.42
7 55 0.55 1.55
8 8 0.08 1.08
9 ### (0.10) 0.90
10 ### (0.12) 0.88
Average Return 17.93 4.4137 Product
0.16 Geometric average product^(1/n) - 1
22.37748692573 16.01%
Expected return
k p
Scenario Return Probability k*p
Highly optimistic ### ### 5.4
Optimistic ### ### 6
Average ### ### 7.7
Below average ### ### 3
Pessimistic ### ### -1.2
Expected Return = E(k) 20.9
7 years at 19.96% Year Return k (1+k)
1 20 0.2 1.2
2 22 0.22 1.22
3 18 0.18 1.18
4 26 0.26 1.26
5 21 0.21 1.21
6 16 0.16 1.16
7 17 0.17 1.17
Sum 140
Average 20 Product 3.574562
((Product(1+ki))^(1/n))-1
Geometric return 0.199587

19.96%

product^(1/n) - 1

15.4%, 26.75%, - 3.26%, 46.44%, 28.65%, 12.6%, 19.8%, and 30.25%.

 1 20
2 22
3 18
4 26
5 21
6 16
7 17
Average 20
Standard Deviation 3.415650255

Year Return
1 16.4
2 27.45
3 33.22
4 -2.07
5 21.22
6 42.09
7 55.34
8 -7.77
9 -10.25
10 11.88
Standard Deviation 21.62

Standard deviation with probabilities

k p
Scenario Return Probability k*p
 Highly optimistic 54.00 0.1 5.4
Optimistic 30.00 0.2 6
Average 22.00 0.35 7.7
Below average 15.00 0.2 3
Pessimistic -8.00 0.15 -1.2
Expected Return = E(k) 20.9

k p k*p
Scenario Return Probability
Highly optimistic 64 0.1 6.4
Optimistic 32 0.2 6.4
Average 20 0.3 6
Below average 12 0.25 3
Pessimistic -6 0.15 -0.9
Expected Return 20.9

Range 70
Range/4 17.5

Scenario Return (K) Probability (P) k*p Deviations Sq.Deviation

Highly optimistic 64 0.05 3.2 40.85 1668.7225
Optimistic 35 0.15 5.25 11.85 140.4225
Average 25 0.5 12.5 1.85 3.4225
Below average 15 0.2 3 -8.15 66.4225
Pessimistic -8 0.1 -0.8 -31.15 970.3225
Expected Return 23.15 Variance
St. Dev
Range 72
Range/4 18

Very pessimistic -7% 0.1 Pessimistic 10% 0.2 Neutral 21% 0.4 Optimistic 32% 0.2 Highly Optimis

17.5%. The first flow is at the end of the first year. 12,700, 9,450, 21,750, 18,750, and 25,600, res
 Deviation Sq. Dev
1 20 4.166667 17.36111
2 -5 -20.83333 434.0278
3 0 -15.83333 250.6944
4 25 9.166667 84.02778
5 20 4.166667 17.36111
6 30 14.16667 200.6944
7 5 -10.83333 117.3611
8 10 -5.833333 34.02778
9 15 -0.833333 0.694444
10 20 4.166667 17.36111
11 35 19.16667 367.3611
12 15 -0.833333 0.694444
15.83333 Sum 1541.667
Variance 140.1515
11.83856 St Dev 11.83856

Deviations Squared Sq. Dev.*p

Deviation
 33.10 1095.61 109.561
9.10 82.81 16.562
1.10 1.21 0.4235
-5.90 34.81 6.962
-28.90 835.21 125.2815
Variance 258.79
St. Dev. 16.08695

Deviations Squared p* sq. dev

Deviation Expected Return
43.1 1857.61 185.761 Deviations
11.1 123.21 24.642 Dev Squared
-0.9 0.81 0.243 Multiply sq dev by probability
-8.9 79.21 19.8025 Sum Dev Sq
-26.9 723.61 108.5415 Sq root of Sum of sq dev
Variance 338.99
St. Dev 18.41168

p* sq. dev
83.436125
21.063375
1.71125
13.2845
97.03225
216.5275
14.71487342793

tic 32% 0.2 Highly Optimistic 50% 0.1

0, 18,750, and 25,600, respectively.  *

3.57456213
0.199587

Situation 2 Red Green Red -Green

Stock return 13% 13% 13%
St Dev 16 16 0

Combination Red-Green moving in oppowite direction (Correlation = negative 1)

(a+b)^2
Power point
Standard
Return deviation If correlation is -.6
A 18 20
B 22 25 .4^2*20^2 +.6^2*25^2+2*(.4)*(.6)
(A40+B60) 20.4 20.81 Corr = +.6 wA^2*SigmaA^2
(A40+B60) 20.4 12.04 Corr = -.6 wB^2*SigmaB^2
Cross
Sum
Sq Root

w1 0.4 433
w2 0.6
ⴋ1 20 ⴋ 20.80865
ⴋ2 25
ⴒ 0.6
tion = negative 1)
2 +.6^2*25^2+2*(.4)*(.6)*(20)*(25)*(-.6) If corr = 0
64 64 64
225 225 225
-144 144
145 433 289
12.04159 20.80865
Rational Investor

Situation 1 A B
Stock return 30% 30%
St Dev 20 30 Choose A

Situation 2 A B
Stock return 30% 40% Choose B
St Dev 30 30

Situation 3 A B
Stock return 30% 40% Choice depends on investors risk preference
St Dev 20 30
k preference
Intro+Slide 1 3 Sujon
Slide 4 5 Asif
Slide 6 7 Evana
Slide 8 10 Nahian
Slide+conclusion 11 13 Ema