CHAPTER 2Asset Class Return Expectations

To understand performance measurement it is useful to begin with some knowledge of what investors can expect when they invest. The objective of this review is to provide a background for the performance measurement discussion. The first observation is that there is a variety of opportunities for investing.

THE EXPECTED RANGE OF RETURNS FROM DIFFERENT KINDS OF INVESTMENTS

Intuitively we know that different kinds of investments have different kinds of risks and potential payoffs. The payoff for buying a winning lottery ticket is much greater than the interest received on a savings account; however, the probability of payoff is quite a bit smaller—usually close to zero. Choosing among different asset class ...

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