What is the expected return on investment?
Aug 29, 2021 · For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return would be 5% = (50% x 20% + 50% x -10% = 5%). The expected return is a tool used to ...
What is the expected return for a portfolio containing multiple investments?
Apr 01, 2017 · What describes someone's expected outcome from investing in the stock market? Making profit from savings, describes someone's expected outcome from investing in the stock market. Making profit ...
Which accurately explains the difference between stock market and currency exchange?
Jul 23, 2021 · Prospect theory is part of the behavioral economic subgroup. It describes how individuals make decisions between alternatives where risk is involved and the probability of different outcomes is ...
Can an investor outperform the market if the anomalies don't exist?
Apr 02, 2022 · Whether or not markets such as the U.S. stock market are efficient, or to what degree, is a heated topic of debate among academics and …
What is expected return?
Expected return and standard deviation are two statistical measures that can be used to analyze a portfolio.
What is standard deviation in portfolio?
Standard deviation of a portfolio, on the other hand, measures the amount that the returns deviate from its mean, making it a proxy for the portfolio's risk. Expected return is not absolute, as it is a projection and not a realized return.
Is expected return based on historical data?
The expected return is usually based on historical data and is therefore not guaranteed into the future; however, it does often set reasonable expectations. Therefore, the expected return figure can be thought of as a long-term weighted average of historical returns .
Is expected return dangerous?
Limitations of Expected Return. To make investment decisions solely on expected return calculations can be quite naïve and dangerous. Before making any investment decisions, one should always review the risk characteristics of investment opportunities to determine if the investments align with their portfolio goals.
What is the bottom line of Prospect Theory?
Bottom Line. Prospect theory says that individuals will accept an investment when the gains are presented, versus the losses. That is, investors weigh potential gains more than potential losses.
How does Prospect Theory work?
Prospect theory belongs to the behavioral economic subgroup, describing how individuals make a choice between probabilistic alternatives where risk is involved and the probability of different outcomes is unknown.
What is the prospect theory?
The prospect theory is part of behavioral economics, suggesting investors chose perceived gains because losses cause a greater emotional impact.
What is the certainty effect in prospect theory?
There is a certainty effect exhibited in the prospect theory, where people seek certain outcomes, underweighting only probable outcomes.
What is the certainty effect?
According to Tversky and Kahneman, the certainty effect is exhibited when people prefer certain outcomes and underweight outcomes that are only probable. 2 The certainty effect leads to individuals avoiding risk when there is a prospect of a sure gain.
Which two philosophers proposed that losses have a greater emotional impact than a gain of the same amount?
Kahneman and Tversky proposed that losses have a greater emotional impact than a gain of the same amount. They said that, given choices presented two ways—with both offering the same result—an individual will pick the option offering perceived gains.
Why do people prefer straight cash?
However, individuals are most likely to choose to receive straight cash because a single gain is generally observed as more favorable than initially having more cash and then suffering a loss. Although there is no difference in the actual gains or losses of a certain product, the prospect theory says investors will choose the product ...
What is the weak form of market efficiency?
The weak form of market efficiency is that past price movements are not useful for predicting future prices. If all available, relevant information is incorporated into current prices, then any information relevant information that can be gleaned from past prices is already incorporated into current prices. Therefore future price changes can only ...
Why is a market more efficient?
A truly efficient market eliminates the possibility of beating the market, because any information available to any trader is already incorporated into the market price. As the quality and amount of information increases, the market becomes more efficient reducing opportunities for arbitrage and above market returns.
What is the Sarbanes Oxley Act? What are some examples?
For example, the passing of the Sarbanes-Oxley Act of 2002, which required greater financial transparency for publicly traded companies, saw a decline in equity market volatility after a company released a quarterly report.
How do value investors make money?
Successful value investors make their money by purchasing stocks when they are undervalued and selling them when their price rises to meet or exceed their intrinsic worth. People who do not believe in an efficient market point to the fact that active traders exist.
Why is EMH not correct?
Further, the fees charged by active managers are seen as proof the EMH is not correct because it stipulates that an efficient market has low transaction costs.
What is an aggressive investor?
An aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance. A person with moderate risk tolerance sits in the balance between an aggressive and conservative investor.
What is conservative investment?
Conservative investors are willing to accept little to no volatility in their investment portfolios. Often, retirees who have spent decades building a nest egg are unwilling to allow any type of risk to their principal. A conservative investor targets vehicles that are guaranteed and highly liquid.
What are the factors that affect risk tolerance?
Other factors affecting risk tolerance are the time horizon you have to invest, your future earning capacity, and the presence of other assets such as a home, pension, Social Security, or an inheritance. In general, you can take greater risk with investable assets when you have other, more stable sources of funds available.
Why is risk tolerance important?
You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.
What is greater risk tolerance?
Greater risk tolerance is often synonymous with equities and equity funds and ETFs, while lower risk tolerance is often associated with bonds, bond funds, and ETFs. But age itself shouldn't determine a switch in asset classes. Those with a higher net worth and more disposable income can also typically afford to take greater risks ...
