7.1 Realized and Expected Rates of Return and Risk

We begin our discussion of risk and return by defining some key terms that are critical to developing an understanding of the risk and return inherent in risky investments. We will focus our examples on the risk and return encountered when investing in various types of securities in the financial markets—but the methods we use to measure risk and return are equally applicable to any type of risky investment, such as the introduction of a new product line. Specifically, we provide a detailed definition of both realized and expected rates of return. In addition, we begin our analysis of risk by showing how to calculate the variance and the standard deviation of historical, or realized, rates of ...

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