Nominal interest rate-the growth rate of your money. Real interest rate- the growth rate of your purchasing power. the real rate of interest is the nominal rate reduced by the loss of purchasing power resulting from inflation. the approximation rule overstates .The approximation rule is more exact for small inflation rates and is perfectly exact for continuously compounded rates. rr=rn-i ;rr=(rn-i)/1+i; conventional certificates of deposit offer a fuaranteed nominal rate of interest; Because future inflation is risky, the real rate of return is risky even when the nominal rate is risk free. Supply, Demand and governement actions determine the real interest rate. The nominal interest rate is expected inflation. Increase the government's budget deficit, increasing borrowing demand, shift right; a forecast higher than previously expected, shift supply right.rn=rr+E(i) Fisher equation when real rates are stable, changes in nominal rate ought to predict change in flation rates. rn(1-t)-i= (rr+i)(1-t)-i=rr(1-t)-it
EAR effective annual rate defined as the percentage increase in funds invested over a 1 year horizon.1+EAR=(1+ rate per period)*n=(1+APR/N)*n=(1+rf(T))*1/T. Annualized rates on short-term investment often reported using simple rather than compound interest.APR=!!!
Continuous compounding, the total return scales up in direct proportion to the time period.
HPR-holding-period-return, rate of return over given investment period HPR=Ending price-Beginning price+Dividend/Beginning price
Expected return :mean value of distribution of HPR.E(r)=??probability * HPR
Dividend yield +rate of capital gains =HPR The standard deviation of the rate of return is measure of risk. ??
Variance=Expected value of squared devotion
The arithmetic average provides an unbiased estimate of the expected future return. E(Geometric average)=E(Arithmetic)-1/2 s2

Risk aversion: