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Risk premium definition, calculator
Different stocks offer different levels of expected return. What causes stock A’s expected return to be higher than stock B’s expected return? How does the expected return on a risky asset relate to the risk-free rate of return? In this post, we answer both questions by introducing the concept of risk premium. Jump to: Risk […]
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The opposite of risk averse?
We, humans, have a general tendency to avoid taking risks when we can, a notion that we refer to as risk aversion. This has the important implication that when we are faced with a choice between a safe payoff and a risky one, we’d opt for the latter only if it entails a sufficient risk […]
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Fair game meaning
In daily language, “fair game” can be used to suggest that something or someone can be an object of criticism (perhaps because of their behavior or nature). But, what about the meaning of fair game in an economic or financial context? In such a context, a fair game can be defined as a game in […]
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Risk appetite definition
It is clear that some people are more comfortable investing in risky stocks than others. In a similar vein, some firms carry significantly more operational risks and/or financial risks than their competitors. Therefore, the appetite for risk varies across both firms and individuals. But, what is risk appetite? Generally speaking, an individual’s or an organization’s […]
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Calculating the correlation between two stocks
In this tutorial, we explain how to calculate the correlation between two stocks and how to construct a correlation matrix using Excel. Jump to: Using Excel to calculate correlations between pairs of stocks Constructing a correlation matrix of stock returns Interpreting the correlation between two stocks Video tutorial: Correlation between two stocks Using Excel to […]
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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? Imagine an investor who bought shares of a stock three years ago. According to the investor’s calculations, […]
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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 The geometric average return formula (or the geometric mean return formula) can be written as follows: […]
