What is a Factor Return?

The expected rate of return is also called the expected rate of return, which refers to the expected rate of return on an asset that can be realized in the future under uncertain conditions. The risk-free rate of return is generally based on the annual interest rate of short-term government bonds.

Expected rate of return

Calculation

In measuring market risk and return models, the oldest, and so far most companies have adopted

We mainly use the capital asset pricing model as the basis and combine the arbitrage pricing model to calculate.

The first concept is the beta value. It indicates the degree of risk of an investment:

value of asset i = covariance of asset i and market portfolio / variance of market portfolio

The covariance between the market portfolio and itself is the variance of the market portfolio, so the beta value of the market portfolio is always equal to 1, the beta value of the investment with greater risk than the average asset is greater than 1, and the beta value of the riskless investment is equal to 0.

It should be noted that in the investment portfolio, the return rate of individual assets may be less than 0, which indicates that the return on investment of this asset will be less than the risk-free interest rate. Generally speaking, avoid such investment projects unless you are good enough to be decentralized.

The next question is the return on a single asset:

The expected return of an asset is linearly related to its value:

Expected return on asset i

E (Ri) = Rf + i [E (Rm) -Rf]

Of which: Rf: risk-free rate of return

E (Rm): Expected return on market portfolio

i: The beta value of investment i.

E (Rm) -Rf is the risk premium of the investment portfolio.

The value of the entire investment portfolio is the weighted average of the values of each asset in the investment portfolio. In the absence of arbitrage, the return on assets.

In the case of multiple factors:

E (R) = Rf + i [E (Ri) -Rf]

Among them, E (Ri): the expected return of the investment portfolio whose is 1 and is 0 for other elements.

First determine an acceptable rate of return, the risk premium. Risk premium measures the additional return that an investor needs to transfer their assets from a risk-free investment to an average venture capital investment. Risk premium is the difference between the expected return on your portfolio minus the return on risk-free investments. This number is usually significant if it is greater than 1, otherwise it means that your portfolio selection is problematic.

The higher the risk, the greater the expected risk premium.

Risk-reward

In developed markets such as the United States, there are sound stock markets as a reference. Based on the current situation in China, it is still difficult to draw a suitable conclusion from the stock market, and it may not be a good choice to estimate the risk premium based on the growth rate of GDP.