Rather than taking each rate of return and multiplying them with the weight to get the total weight of each asset, there is a simple formula to calculate the expected rate of return. The expected rate of return of a portfolio or simply the return of a portfolio is the given weighted average of the expected returns on the assets.ExampleLet's take an example of a two-asset portfolio and see how to calculate its expected return. Let’s assume an investor has invested 50% of his investment in X and 50% in Y.$$\mathrm{ERR\:of\:Portfolio = (Weight\:of\:Security\:X × 0.5) + (Weight\:of \:Security\:Y × 0.5)}$$Note ... Read More

Unrealized gains are profits from the stock price increase over the buying price of the stocks one still owns. The gains are unrealized as you have not realized the increase in profits in your bank account yet. In such cases, one won't understand the gain until one sells the stock, and the price could change again before the stocks are sold.Unrealized gains do not consider the taxes one will owe when he or she does cash out. Neither does it consider the transaction commissions to sell the stock. When the investors sell the stock, they will have to pay taxes ... Read More

Interest on Ordinary SharesA Rate of Return (RoR) is the loss or gain from an investment that is held over a certain period of time. In other words, the rate of return of an investment is the loss (or gain) compared to the initial cost or investment. The net gain or loss is typically expressed in percentage terms. When the RoR is negative, it is considered a loss and when the ROR is positive, it reflects a gain on the investment.RoR is calculated with the following formula −$$\mathrm{RoR =\frac{End\:Value\:of\:Investment − Initial\:Value\:of\:Investment}{Initial\:Value\:of\: Investment}× 100}$$The point to note here is that any gains or losses ... Read More

Preference shares are ownership security or equity. However, preference shareholders do not have any voting rights in a stockholders’ meeting. Preference shares pay dividends that are mentioned in the prospectus when the share is bought. Preference share dividends are paid before common stock dividends.Note − Preference shares are ‘preferred’ so they need to be paid before common shares.Calculating the yieldYield is the effective interest rate obtained from the preference share as dividends. The yield is equal to the yearly dividend divided by the current price of the stock.Suppose a preference share of INR 120 pays dividends of INR 50 per ... Read More

There is a distinct difference between "growth shares" and "income shares", however finding the value of grown and income shares is easier said than done. Even in mature markets, the difference between the growth shares and the income shares is not clear. Let’s take a closer look at both the types and differentiate the two.Growth SharesGrowth shares are those shares whose company earnings are estimated to grow at a faster rate than the market. These shares, therefore, have the chance to rise incredibly faster than the market. Growth stocks tend to have a high price-to-earnings (PE) ratio, indicating that they ... Read More

Risk Preference is one’s tendency to choose either a risky or less risky option. Usually, economists and finance professionals, and investors apply the concept of risk preference in economics, but the concept can be applied to any decision one makes that involves risk. There are several types of risk preferences, and the risk involved generally depends on the decision-maker and the investor for whom the decision-maker takes the risk.Risk-Seeking PreferenceThe risk-seeking preference applies to investors who are willing to take increased risks to achieve higher-than-usual returns. It is necessary to weigh all the factors associated with the risk and assess ... Read More

In Mathematics, the mean or average return is defined as the average of all the given values. To find the mean, the added sum of all the given values is divided by the total number of values given.Standard deviation (SD), on the other hand, is a measure of the dispersion of the data points from the mean. Standard deviation, therefore, shows how far the data points are spread out from the average value. SD measures the absolute variability of the data distribution.Note − SD is the most popular measure of variability and is used often to determine the volatility of ... Read More

The Constant Growth Model is a way of share evaluation. Also known as Gordon Growth Model, it assumes that the dividends paid by the company will continue to go up at a constant growth rate indefinitely. It helps investors determine the fair price to pay for a stock today based on future dividend payments.For a company paying out a steadily rising dividend, one can estimate the fair value of the stock with a formula that considers that constantly increasing payout is responsible for the stock's value. The formula is, $$\mathrm{𝑃 =\frac{𝐷}{(𝑟 − 𝑔)}}$$Where, P is the current share price, D ... Read More

Valuation of SharesValuation of a share means finding the fair value of the share being considered. It is a process of understanding the value of a company’s shares. It indicates whether a share is overvalued or undervalued. The valuation is based on market supply and demand and is based on quantitative measures.The value of shares of listed companies is easy to get. However, the companies that are not listed need to be carefully reviewed before judging their fair value.When is the valuation of shares required?Valuation of shares is needed when one is buying or selling a business and wants to ... Read More

Geometric Mean ReturnThe geometric mean return, also called the geometric average return, is a way to calculate the average compounding rate of return on the investments. It considers the compound interests multiplied by the interest over the number of periods.The geometric mean return is a good measure above the arithmetic return that calculates the interests in a simple arithmetic measure. In case of arithmetic returns, all interests of sub-periods are added and then the total is divided by the total number of sub-periods. The arithmetic average return is misleading in case of long-tenured investments because it overstates the true return. ... Read More