Risk and Risk Premiums, ‘Investments’

Risk-Return trade off = intuition

Holding-Period Returns
- HPR assumes the dividend is paid at the end of the holding period.
- HPR ignores reinvestment income between the receipt of the payment and the end of the holding period.

Expected Return and Standard Deviation
- The higher the volatility in outcomes, the higher will be the average value of these squared deviations.

Excess Returns and Risk Premiums
- Risk-free rate : the rate you can earn by leaving money in risk-free assets such as T-bills, money market funds, or the bank.
- Risk premium : the difference between expected HPR and Risk-free rate
- Excess return : the difference in any particular period between the actual rate of return on a risky asset and the actual risk-free rate.
- ex-ante: Expected return = Risk-free rate + Risk premium
  ex-post: return = Risk-free rate + excess return