Define :

- Return : percentage change of the value on the investor.

- Effective Annual Return (EAR): The return on an

investment expressed on an annualized basis
Risk-free rate: The rate of return on a riskless, i.e.,
certain investment.
Risk premium: The extra return on a risky asset over
the risk-free rate.
Variance is a common measure of return dispersion.
Sometimes, return dispersion is also call variability.
Standard deviation is the square root of the variance.
Normal distribution: A symmetric, bell-shaped
frequency distribution that can be described with only
an average and a standard deviation.
Exercise 1 :
1. What is mean by an investment? Provide several examples :

- Purchasing an assets in order to create wealth

Example : car
- It is used for personal consumption that is not an
investment

- If the car used for venting or as a taxi, then it is an

investment
1. Define financial independence.
Explain how an investor can achieve financial independence :
-

means being able to choose how you want to live

your life, whether you are rich or a salary earner.

Decide You Want It More than You Are Afraid Of It

Always Keep Your Career or Business Moving Forward
Vow to Always Save Money No Matter What Your Income Is
Diversify Your Investments

2. What is meant by the risk adjusted return? Explain how you

would make use of this measure in your investment decision
making :

Risk-adjusted return refines an investment's return by measuring how

much risk is involved in producing that return, which is generally
expressed as a number or rating. Risk-adjusted returns are applied to
individual securities, investment funds and portfolios.
The concept of risk adjusted return can be used to
compare the returns of portfolios with different risk levels
against a benchmark with a known return and risk profile.

3. Estimate the risk adjusted return for the following two assets (A
and B)

4. What is meant by the risk premium?

A risk premium is the return in excess of the risk-free rate of return
an investment is expected to yield; an asset's risk premium is a
form of compensation for investors who tolerate the extra risk,
compared to that of a risk-free asset, in a given investment

5.
6.
7.
8. Calculate the arithmetic mean and the geometric mean for the
following asset

Exercise 2
What is the difference between arithmetic mean and geometric mean?
Which method does take into account the compounding effect when
the average return is calculated? Motivate your answer
by giving an example.

the arithmetic mean is a mathematical representation of the typical value

of a series of numbers, computed as the sum of all the numbers in the
series divided by the count of all numbers in the series.

The geometric mean is the average of a set of products, the calculation

of which is commonly used to determine the performance results of an
investment or portfolio.
the best is geometric average because it is more accurate than arithmetic
average