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Relation between expected return in real life and probability?
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∙ 12y ago
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Wiki User
∙ 12y ago
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How do you interpret Probability of default?
Distance-to-Default:-- distance between the expected value of the asset and the default point- after substitution into a normal c.d.f one gets probability of defaultDD(t) =ln(V/F)+(µ-0.5*σ^2)*T/(σ*sqrt(T));Where, V= value of the assetsF=Value of the liability/debtµ= expected return of assetsσ=Volatility of the assetsT= TimeAnd Probability of default:-PD(t) = NormDist(-DD)= Ɲ(-DD)
How are variance and standard deviation used as measures of risk for both a security and a portfolio?
Risk reflects the chance that the actual return on an investment may be very different than the expected return. One way to measure risk is to calculate the variance and standard deviation of the distribution of returns.Consider the probability distribution for the returns on stocks A and B provided below.StateProbabilityReturn onStock AReturn onStock B120%5%50%230%10%30%330%15%10%320%20%-10%The expected returns on stocks A and B were calculated on the Expected Return page. The expected return on Stock A was found to be 12.5% and the expected return on Stock B was found to be 20%.Given an asset's expected return, its variance can be calculated using the following equation:whereN = the number of states,pi = the probability of state i,Ri = the return on the stock in state i, andE[R] = the expected return on the stock.The standard deviation is calculated as the positive square root of the variance.Note: E[RA] = 12.5% and E[RB] = 20%Stock AStock B
What is it called when you pick an object and do not return it in probability?
When you pick an object and do not return it, in probability it is termed "without replacement".
How is expected rate of return calculated from average rate of return on investment and standard deviation?
The expected rate of return is simply the average rate of return. The standard deviation does not directly affect the expected rate of return, only the reliability of that estimate.
What is the capital asset pricing model?
The CAPM is a model for pricing an individual security (asset) or a portfolio. For individual security perspective, we made use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class. The SML enables us to calculate the reward-to-risk ratio for any security in relation to that of the overall market. Therefore, when the expected rate of return for any security is deflated by its beta coefficient, the reward-to-risk ratio for any individual security in the market is equal to the market reward-to-risk ratio
Relation between marginal efficiency of capital and marginal efficiency of investment?
MEC is the highest rate of return expected from an additional unit of capital stock over its cost. MEI is the expected rate of return from one additional unit of investmeni.
Difference between marginal efficiency of investment and marginal efficicency of capital?
MEC is the expected rate of return on capital and MEI is the expected rate of return on investment.
How do you interpret Probability of default?
Distance-to-Default:-- distance between the expected value of the asset and the default point- after substitution into a normal c.d.f one gets probability of defaultDD(t) =ln(V/F)+(µ-0.5*σ^2)*T/(σ*sqrt(T));Where, V= value of the assetsF=Value of the liability/debtµ= expected return of assetsσ=Volatility of the assetsT= TimeAnd Probability of default:-PD(t) = NormDist(-DD)= Ɲ(-DD)
How are variance and standard deviation used as measures of risk for both a security and a portfolio?
Risk reflects the chance that the actual return on an investment may be very different than the expected return. One way to measure risk is to calculate the variance and standard deviation of the distribution of returns.Consider the probability distribution for the returns on stocks A and B provided below.StateProbabilityReturn onStock AReturn onStock B120%5%50%230%10%30%330%15%10%320%20%-10%The expected returns on stocks A and B were calculated on the Expected Return page. The expected return on Stock A was found to be 12.5% and the expected return on Stock B was found to be 20%.Given an asset's expected return, its variance can be calculated using the following equation:whereN = the number of states,pi = the probability of state i,Ri = the return on the stock in state i, andE[R] = the expected return on the stock.The standard deviation is calculated as the positive square root of the variance.Note: E[RA] = 12.5% and E[RB] = 20%Stock AStock B
What is it called when you pick an object and do not return it in probability?
When you pick an object and do not return it, in probability it is termed "without replacement".
How is expected rate of return calculated from average rate of return on investment and standard deviation?
The expected rate of return is simply the average rate of return. The standard deviation does not directly affect the expected rate of return, only the reliability of that estimate.
Does the capital asset pricing model help us to get required rate of return or expected rate of return?
expected rate of return
A radom number generator is used to select a number from 1 to 100 What is the probability of selecting the number 153?
The probability should be 0 (zero). 153 is not between 1 and 100. If you meant your number generator to return a number between 1 and 1000, the probability would be 1/1000 = .001 = .1%
10000 to invest in a stock portfolio. stock A expected return 18 and stock B expected return 11. create a portfolio with expected return of 16.25. how much to invest in stock A and stock B?
6000.00
Why CML is a special case of SML?
CML a special case of SML. While CML represents Return potential and risk involved in all financial asset across the Capital market, SML is the linear relationship between the expected return of security and its systematic risk, the expected return comparing a risk-free return plus a risk premium.
what is the expected portfolio return on a portfolio comprised of 25% h stock and 75% l stock?
As a well-informed investor, you naturally want to know the expected return of your portfolio—its anticipated performance and the overall profit or loss it's racking up. Expected return is just that: expected. It is not guaranteed, as it is based on historical returns and used to generate expectations, but it is not a prediction. The expected return of a portfolio will depend on the expected returns of the individual securities within the portfolio on a weighted-average basis. A well-diversified portfolio will therefore need to take into account the expected returns of several assets. KEY TAKEAWAYS To calculate a portfolio's expected return, an investor needs to calculate the expected return of each of its holdings, as well as the overall weight of each holding. The basic expected return formula involves multiplying each asset's weight in the portfolio by its expected return, then adding all those figures together. In other words, a portfolio's expected return is the weighted average of its individual components' returns. The expected return is usually based on historical data and is therefore not guaranteed. The standard deviation or riskiness of a portfolio is not as straightforward of a calculation as its expected return. How to Calculate Expected Return To calculate the expected return of a portfolio, the investor needs to know the expected return of each of the securities in their portfolio as well as the overall weight of each security in the portfolio. That means the investor needs to add up the weighted averages of each security's anticipated rates of return (RoR). An investor bases the estimates of the expected return of a security on the assumption that what has been proven true in the past will continue to be proven true in the future. The investor does not use a structural view of the market to calculate the expected return. Instead, they find the weight of each security in the portfolio by taking the value of each of the securities and dividing it by the total value of the security. Once the expected return of each security is known and the weight of each security has been calculated, an investor simply multiplies the expected return of each security by the weight of the same security and adds up the product of each security. Formula for Expected Return Let's say your portfolio contains three securities. The equation for its expected return is as follows: Ep = w1E1 + w2E2 + w3E3 where: wn refers to the portfolio weight of each asset and En its expected return.
What would be the best air fare from Toronto to New York return?
Depending on when the trip from Toronto to New York return is to take place, a price between $200 and $400 would be expected. A more costly trip is expected if it is to occur during holiday periods.
