Historical (or realized) returns are particularly useful when evaluating an asset’s past performance. As such they are backward-looking measures. But, in order to forecast an asset’s future performance, we need a forward-looking measure. This measure is called the expected return. Learning objectives: Learn how to calculate an asset’s expected return. Understand why we need to […]
Return volatility – A measure of risk
In finance, we often say that risk and return are the two sides of a coin. Therefore, metrics such as arithmetic average return and geometric average are helpful when evaluating the past performance of an investment but are not sufficient on their own without proper consideration of risk. In this post, we introduce return volatility […]
Average return – Arithmetic vs geometric
When investors analyze the past performance of their investments in stocks, bonds, etc., one of the key metrics they focus on is the average return, which is also known as the average historical return or average realized return. Learning objectives: Use a series of past returns to calculate the average realized return. Understand the distinction […]
Holding period return – How is it calculated?
When investors buy securities (e.g., stocks), they may hold them for months or years before selling them. The duration during which an investor holds on to a particular security is known as the holding period and the return over that period is referred to as the holding period return. Learning objectives: Learn how to perform […]
Nominal returns vs real returns – What is the difference?
Suppose that an asset yields a return of 50% over a year. So, if you invest $10,000 today, your investment grows to $15,000 by the end of the year. Sounds not too bad, right? But, imagine that the inflation rate over the course of the year was 60% (this is highly unlikely in most economies, […]
Basic return calculations – Dividend yields, capital gains
Investing is all about realizing a positive return. Therefore, it is crucial for investors to make accurate return calculations. Learning objectives: Understand the concepts of net return, total return, dividend yield, and capital gains. Learn how to perform basic return calculations. Net returns and gross returns Suppose you bought shares of a stock for $10 […]
Arbitrage opportunity – How does it work?
In financial markets, investors compete with each other to exploit arbitrage opportunities that often quickly disappear once they are discovered. But, what exactly is an arbitrage opportunity and how do you exploit it?Learning objectives: Define the concept of an arbitrage opportunity. Understand how investors follow the “buy low, sell high” strategy to exploit arbitrage opportunities. […]
Short selling – What are the benefits and risks?
In most cases, investors or traders would first purchase a security (stock, bond, etc.), hold it for some time (from seconds to years…), and, finally, sell it with the hope of realizing a profit. However, beginner investors may be unaware that the sequence of buying and selling can actually be reversed. That is, you can […]
Long position vs short position – How to interpret?
For a beginner trader, it may be easy to get lost quickly listening to a conversation by seasoned traders. Trading and investing involve lots of technical terms and specific jargon. Sometimes, you hear traders say “I’m long on company X” or “short on company Y.” What do traders mean by long positions and short positions? […]
