Capital Allocation Line (CAL) and Optimal PortfolioThe Capital Allocation Line (CAL) is a line that shows the risk-and-reward profile of assets and can be utilized to build an optimal portfolio. The process of building the CAL for a set of portfolios is given below.Portfolio Expected Return and VarianceLet’s construct a ... Read More

A risk-free asset comes with a virtually guaranteed return. Usually, all investments have a degree of risk associated with them, so the term "risk-free" is used to mean the assets that are sufficiently safe so that investors can remain sure to get a return on their investment that is somehow ... Read More

The Arithmetic Average Return is calculated by adding the rate of returns of "n" sub-periods and then dividing the result by "n". In other words, the returns of "n" sub-periods are added and then divided by "n" to find the value of the average return. As it is also the ... Read More

The typical reason for an investor to invest in a financial instrument is to make current income from dividends and interest income. For a stable company, the investments will earn a reasonable return that is the Expected Rate of Return (ERR) on given investments. Some investments such as debentures, bank ... Read More

Present Value of Growth Opportunities or PVGO represents the component of a company’s share value that relates to expectations of the investors in the growth of earnings. PVGO is the difference between the total value of a company’s shares from which the net present value of its earnings is deducted, ... Read More

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 ... 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, ... 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 ... 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 ... 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 ... Read More