5_Learning about Return and Risk from the Historical Record
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Nominal Interest Rate
The interest rate in terms of nominal (not adjusted for purchasing power) dollars.

Real Interest Rate
The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.

Effective Annual Rate (EAR)
Interest Rate is annualized using compound rather than simple interest.

Annual Percentage Rate (APR)
Interest rate is annualized using simple rather than compound interest.

Dividend Yield
The percent rate of return provided by a stock's dividend payments.

RiskFree Rate
The interest rate that can be earned with certainty.

Risk Premium
An expected return in excess of that on riskfree securities. The premium provides compensation for the risk of an investment.

Excess Return
Rate of return in excess of the riskfree rate.

Risk Aversion
Dislike risk.

Normal Distribution
Bellshaped probability distribution that characterizes many natural phenomena.

Event Tree
Depicts all possible sequences of events.

Skew
Measure of the asymmetry of a probability distribution.

Kurtosis
Measure of the fatness of the tails of a probability distribution. Indicates probability of observing extreme high or low values.

Lognormal Distribution
The log of the variable has normal (bellshaped) distribution.

Value At Risk (VaR)
Measure of downside risk. The loss that will be incurred in the event of an extreme adverse price change with some given, typically low, probability.

Conditional Tail Expectation (CTE)
Expectation of a random variable conditional on its falling below some threshold value. Often used as a measure of downside risk.

Lower Partial Standard Deviation (LPSD)
Standard deviation computed using only the portion of the probability distribution below the mean of the variable.