The following points have been mainly covered in this chapter:
Solutions to Solve Them!
It is shown by time-series graph how do individual years matter. A histogram can’t any longer show this
It is made easier by a histogram to view how frequent the various kinds of outcomes, and therefore, where the distribution is centered and also how much spread out it are.
The interaction of time series of return rates for producing long-term returns is shown by a compound return graph. To put it in different words, it can be seen whether money would have been lost or made by a long-term investment. This is hard to be seen in time-series graph.
Since the returns in (c) and (b) are alternative, you simply have to calculate the safe two-year returns. Thereon, they shall continue in their patterns
Yes. For an investment that is more volatile, difference between the average and annualized return rate is greater
Here risk is lowest for cash, higher for bonds, even higher for stock market portfolio and the individual stocks are the riskiest. For the first 3, average reward sees a growth, but that isn’t necessarily true in case of individual stock.
Individuals stocks come with more risk generally, although not always.
Yes. As an example, UAL in Table 7.1 lost everything yet had an average return rate that was positive
For graphing the market beta, the return rate on market must be on x-axis and the return rate on investment for which market beta needs to be decided must be on the y-axis. The two return rates from a particular time period is called a data point. Market beta is gradient of line of best fit.
The market beta is 1. Since the return rate on market is plotted on both x-axis and y-axis, the gradient of diagonal line (45°) is the market beta.
Brokers are responsible for executing orders and keeping track of portfolios of investors. Purchase on margin is also facilitated by them.
It is generally the larger investors who use prime brokers. These brokers let investors utilize their own trade for executing trades. Margin, securities borrowing and portfolio accounting are provided by prime brokers, just as retail brokers.
In an ideal world, if you short a stock, your return rate is higher since you get interest on proceeds. In reality, your broker might utilize the interest. Also, it attempts at crossing orders for a certain number of times per day.
Often, the specialist serves as a monopolist making market on NYSE. Buying and selling is done by the specialist from his own stock inventory, thus making a market. On NASDAQ, the equivalent is market makers, although usually there are many and are in competition with each other. Unlike regular investors, both market makers and specialists can see limit orders that placed by investors.
Often, the substitutes are electronic. They also often depend on matching trades. Therefore, the trades they can’t match may not be executed. ECNs (Electronic Communication Networks) are a major example of such. Executing trade in OTC (over-the-counter) market is another alternative. OTC market is a network of dealers who are geographically dispersed and who make markets in different securities
In case of open-end fund, fund shares must be purchased and redemption must be requested by you. If you do not want to suffer the price risk, you may short underlying holdings while you wait to redeem. You shall have to drive out the management for allowing redemption of your shares, in case of a closed-end fund.
The primary mechanisms of flow of money into firms from investors are first the SEOS andIPOs, secondly the reverse mergers, which then are sold to the investors.
Funds disappear from public financial markets to the investors through share repurchases and dividends.
Shares may disappear in a repurchase or a delisting.