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The risk–return spectrum (also called the risk–return tradeoff or risk–reward) is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. The more return sought, the more risk that must be undertaken.
We typically do not know if the asset will have this return. We estimate the risk of the asset, defined as standard deviation of the asset's excess return, as 10%. The risk-free return is constant. Then the Sharpe ratio using the old definition is = = Example 2. An investor has a portfolio with an expected return of 12% and a standard deviation ...
Investing. Risk level. None to low. Moderate to high. Access to money. Immediate or within a few days. Within a few days to liquidate and receive funds. Typical annual returns. 4% to 5% APY in ...
This means if reinvested, earning 1% return every month, the return over 12 months would compound to give a return of 12.7%. As another example, a two-year return of 10% converts to an annualized rate of return of 4.88% = ((1+0.1) (12/24) − 1), assuming reinvestment at the end of the first year. In other words, the geometric average return ...
The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of return for investments, and other factors deemed relevant by management. As an example, suppose a manager knows that investing in a conservative project, such as a bond investment or another project with no risk, yields a known rate of ...
In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition that no other portfolio exists with a higher expected return but with the same standard deviation of return (i ...
This is based on the concept that riskier assets should have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha.
Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate ...