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𝐑≈𝐫+𝐢
↓
r≈R−i
𝐍𝐨𝐦𝐢𝐧𝐚𝐥 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐑𝐚𝐭𝐞 ≈ 𝐑𝐞𝐚𝐥 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐑𝐚𝐭𝐞 + 𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞
Approximate relationship between interest rates.
(𝟏 + 𝐑) = (𝟏 + 𝐫)(𝟏 + 𝐢)
↓
R−i
r=
1+i
Exact relationship between interest rates.
Approximation rule overstates real rate by the factor 1 + i.
Tutorial 3
Tutorial 3
(𝟏 + 𝐄𝐀𝐑)𝐓 = 𝟏 + 𝐓𝐑 𝐓
If Total Return period is more than a year.
Annual Percentage Rate (APR): annualized interest rate using simple interest.
𝐀𝐏𝐑 = 𝐓𝐑 𝐓 × 𝐧
If Total Return period is less than a year.
𝐓𝐑 𝐓
𝐀𝐏𝐑 =
𝐓
If Total Return period is more than a year.
(𝟏 + 𝐄𝐀𝐑)𝐓 = 𝟏 + 𝐀𝐏𝐑 × 𝐓
If Total Return period is more than a year.
Tutorial 3
Tutorial 3
Kurtosis
∑𝐧𝐢=𝟏[𝐑 𝐢 − 𝐄(𝐫)]𝟒 ⁄𝐍
𝐊𝐮𝐫𝐭𝐨𝐬𝐢𝐬 = −𝟑
̂𝟒
𝛔
A measure of degree of fat tails called kurtosis.
When kurtosis is positive, fat tails would be observed.
Tutorial 3
Tutorial 3
5% VaR means that 95% of returns will be above VaR and 5% of returns will be
below VaR.
5.8 Historical Returns on Risky Portfolios: Equities and Long-Term Government Bonds
Tutorial 3
Tutorial 3
a. What rates you would expect to see for the 4 funds in an advertisement campaign if law
regulation stipulates annualized simple interest to be offered to investors?
b. Which of the fund(s) you will choose if you expect their future performance is similar to
the past performance?
Tutorial 3
Tutorial 3
Tutorial 3