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Sequence of returns risk and why it’s important
Sequence of returns risk is the risk that your investments will fall sharply in the first 5-10 years of retirement and larger returns will not come soon enough to allow them to recover. This risk is specific to the descent stage of your financial journey, when you are drawing an income from your investments in […]
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What is the risk-free rate?
The risk-free rate is the rate of return earned on a risk-free asset. While returns on risky assets such as stocks are uncertain, the key distinction of the risk-free rate of return is that we know its exact value at the time of investment. For example, we may expect a stock to yield 8% over […]
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Return volatility formula and calculator
We start this lesson by discussing what is meant by (stock) return volatility. Then, we explain the return volatility formula. Finally, a simple return volatility calculator is provided for your convenience. Jump to: What is (stock) return volatility? Return volatility formula Return volatility calculator What is (stock) return volatility? Imagine an investor who bought shares […]
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Arithmetic average return calculator and formula
In this lesson, we introduce a simple yet really useful measure of investment performance. In particular, we discuss the arithmetic average return formula and provide a practical arithmetic average return calculator. It is really important for investors to be able to accurately assess the performance of their investments. In that sense, arithmetic average (or mean) […]
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Geometric average return calculator and formula
In this post, we explain the geometric average return formula using numerical examples and discuss how it differs from the arithmetic average return. We provide a practical geometric average return calculator as well. Jump to: Geometric average return formula Geometric average return calculator Geometric average vs arithmetic average Geometric average return formula The geometric average […]
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What is risk pooling?
Risk pooling is an important concept that is particularly relevant for areas such as finance, insurance, supply chain management, and healthcare. In this post, we offer a definition of risk pooling, provide examples, and discuss the relevance of risk pooling in different areas. We draw a distinction between risk pooling and risk sharing as well. […]
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Treynor ratio formula and calculator
As part of our investments course, we have already covered two important investment performance measures: Jensen’s alpha and Sharpe ratio. In this post, we focus on the Treynor ratio, which is another popular risk-adjusted performance measure. In particular, we explain the Treynor ratio formula and offer an easy-to-use Treynor ratio calculator as well. Jump to: […]
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Risk aversion coefficient – meaning and formula
When we discussed investors’ risk preferences, we distinguished between risk-averse, risk-neutral, and risk-seeking behavior. We also explained that risk-averse investors expect compensation for bearing risk, which is called a risk premium. But, how do measure risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an individual dislikes risk. In […]
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Emotions in trading and how to control them
Humans are emotional beings. Good news makes us happy, bad ones cause sadness. We feel proud of our successes and regret our mistakes. We may be thrilled to see a celebrity on the street and would fear missing our flight if we leave the house too late. Given that emotions have such a central place […]
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What is liquidity in stocks?
Liquidity is a fundamental concept in finance and trading. But, what is liquidity in stocks in particular and financial markets in general? What is the definition of liquidity risk? In this post, we address these questions by offering a definition of liquidity in economics and finance. Jump to: Definition of liquidity in economics and finance […]
