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Initial Return is the product of a collaboration between finance professionals, academics, and investors. We produce high-quality, educational content for investors, traders, and finance students.
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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 Here is a simple, step-by-step guide to obtaining the correlation coefficient between the returns of two stocks. That is it! This should […]
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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: […]
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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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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 […]
Step-by-step tutorials:
Downloading stock price data
Plotting stock prices and returns
Creating a histogram of stock returns
Descriptive statistics for stock returns
Computing the correlation between two stocks
Modern portfolio theory:
Portfolio return
Portfolio risk
Efficient frontier
Optimal risky portfolio
Market equilibrium:
Capital asset pricing model (CAPM)
Arbitrage pricing theory (APT)
