👍 Unexpected profits are also risky?
Return is the expected or realized result of an investment.
On the other hand, risk means "uncertainty" as in insurance.
You see it as "risk" because it can fall back at any time, even if it yields higher returns than I expected.
So if I want to make a higher return, I have to take more risk.
In the "Capital Markets and Financial Investment Business Act", the risk that the total amount of money paid or owed to be paid exceeds the total amount of money collected or to be recovered is expressed as "investment."
For reference, risk in investment is calculated by standard deviation.
👍 Calculate the rate of return
The rate of return is the ratio of the return to the invested capital, and can be viewed as a consideration for risk holding.
The rate of return is divided into several categories depending on how you look at it.
👊 Retention period yield
This is a measure of what percentage of the return was made during the period of holding the investment asset and is used as a simple performance comparison.
Holding period return (%) = {[Investment asset at the end of the period (sell price) ÷ Investment asset at the beginning (buy price)]-1} X 100
However, since the rate of return varies depending on the investment period, it is common to compare it with the “annual holding period rate of return” which is usually unified as one year.
Annual holding period return (%) = {[(final investment asset ÷ initial investment asset) to the power of 1/n]-1} X 100
*n: Number of years (ex: n=2.5 for 2 years and 6 months)
For example, if you buy Company A's stock for $10,000, buy it for $30,000 after 6 months, receive a dividend of $3,000 in the middle, and sell it for $45,000 after two years, the annual holding period yield is as follows:
{[(45,000 + 3,000) ÷ 30,000] to the power of 1/2-1} X 100 = 26.5%
👊 Finding the average of the returns over the years
When calculating the average of the returns, use either the arithmetic mean or the geometric mean.
Since the arithmetic average is calculated by simply summing the returns for each investment period and dividing it by the total number of years, the rate of return is upward oriented compared to the geometric average. Therefore, it is suitable for use in calculating the expected future return on products you plan to invest in the future.
On the other hand, since the geometric average is calculated in the same way as the annual holding period return, it is suitable for use in calculating the return to date of the products you have held so far.
For example, if a stock price rises from $10,000 to $20,000 after a year and then falls back to $10,000 two years later, the average returns are as follows:
Arithmetic mean = (100%-50%) ÷ 2 = 25% -> "If you buy this stock, you will have a 25% return in 2 years!"
Geometric mean = [(10,000 ÷ 10,000) to the power of 1/2-1] X 100 = 0% -> "I have held this stock for 2 years, but I have no profit!"
👊 Expected rate of return
In a way that reflects that the ROI will vary depending on whether the economy is booming, moderate or slumping, it represents the expected return on average.
| Economic environment | Probability of the economic environment | Share A (current price 10,000) | Share B (current price 10,000) | ||
| Expected share price | Yield | Expected share price | Yield | ||
| Boom | 30% | 12,000 | 20% | 13,600 | 36% |
| Normal | 40% | 10,800 | 8% | 10,800 | 8% |
| Depression | 30% | 9,600 | -4% | 8,000 | -20% |
👊 Required rate of return
It refers to the rate of return subjectively desired by an individual, and is calculated by taking into account the risk.
The required rate of return is calculated using the following formula, and compared with the expected rate of return in the market, you buy a product whose rate of return is undervalued or that is at an appropriate level.
In other words, the required rate of return is a tool for making investment decisions.
Required rate of return = real no risk interest rate + inflation compensation rate + risk compensation
Real risk-free interest rate: Interest rate is the reward for what I'm binding for the future even though I can spend this money right away.
Inflation compensation rate: adding the inflation rate to the real risk free rate
Risk Compensation: A premium added in case of losing money (loss)
*Nominal risk interest rate = real risk interest rate + inflation compensation rate
Naturally, investors prefer assets (undervalued) whose expected returns are generally higher than their demands in the market today, and the prices of those assets will rise.
When the price rises, the expected rate of return decreases again, and the equilibrium point is reached because it equals the required rate of return.
Likewise, assets with an expected rate of return lower than the required rate of return (high valuation) will be neglected and their price will fall.
👊 Weighted average rate of return
If the expected rate of return was the rate of return expected in the market for an individual asset (item), the weighted average rate of return is the method used to express the rate of return of the entire portfolio (stocks, bonds, real estate, etc.) that group the individual assets together.
So, of course, all you have to do is add the expected rate of return for each asset.
For example, if the total investment portfolio of 100 million won is as follows, then the weighted average return can be calculated.
| Investment target | Basic investment amount (Before) | Share of investment | End-of-Term Investment Amount (After) | Annual rate of return = (Before/After - 1) X 100 | Weighted rate of return= X |
| Equity Fund | 4k | 0.4 | 5k | 25% | 10% |
| Bond funds | 4k | 0.4 | 4.2k | 5% | 2% |
| Real Estate Investment Trust | 2k | 0.2 | 2.2k | 10% | 2% |
| Sum | 1B | 1 | 1.14B | - | 14% |