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The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. [1] It is calculated by using the following formula: [] = = where
The lowest of all is the risk-free rate of return. The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference and inflation premium components of minimum expected rates of return that must be met ...
( ()) is the market premium, the expected excess return of the market portfolio's expected return over the risk-free rate. A derivation [ 14 ] is as follows: (1) The incremental impact on risk and expected return when an additional risky asset, a , is added to the market portfolio, m , follows from the formulae for a two-asset portfolio.
Today's concept: risk and return. When it comes to financial matters, we all know what risk is -- the possibility of losing your hard-earned cash. And most of us understand that a return is what ...
An investor who is highly risk averse will hold a portfolio on the lower left hand of the frontier, and an investor who isn’t too risk averse will choose a portfolio on the upper portion of the frontier. Figure 2: Risk-return indifference curves. Figure 2 shows the risk-return indifference curve for the investors.
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. [1] It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return, as demonstrated by the formula below. [2]
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.
Formally, the CCAPM states that the expected risk premium on a risky asset, defined as the expected return on a risky asset less the risk free return, is proportional to the covariance of its return and consumption in the period of the return. The consumption beta is included, and the expected return is calculated as follows: [4]