An Overview of Capital Market History
Table of Contents
1. Goal
Using historical data we want to get an idea about the relationship between risk and return. In particular that higher risk affords higher return. In later chapters we will see that this statement is too simplistic, and in fact only higher systematic risk affords higher returns.
2. Calculating Returns
To calculate returns we need to first calculate our dollar gain or loss, and then divide this by the cost of our investment.
3. Arithmetic Average vs Geometric Average Returns
- Arithmetic Average:
\[\bar{r}_{aa} = \frac{r_1 + r_2 + .... + r_n}{n}\]
- Geometric Average:
\[\bar{r}_{ga} = (r_1 r_2 .... r_n)^{(1/n)}\]