Investment returns and performance analysis are crucial for investors to evaluate investment effectiveness and risks. This article summarizes key influencing factors of investment returns, including risk-free rate, market risk premium, risk measurements like Sharpe Ratio and Treynor Ratio, and major analysis models such as CAPM, Fama-French models. Proper application of these analysis frameworks helps investors make informed decisions by quantifying investment risks and expected returns.
Risk-free Rate and Market Risk Premium Set Baseline Returns
The risk-free rate like treasury bond yields and the market risk premium represented by equity risk premium over risk-free rate together set the baseline returns for investment. The higher the risk-free rate and market risk premium, the higher returns investors would require for taking investment risks.
Sharpe Ratio and Treynor Ratio Measure Investment Risks
Sharpe ratio measuring total risk and Treynor ratio assessing systematic risk are two major metrics evaluating investment risks. The higher the ratios, the better risk-adjusted returns, indicating attractive investment opportunities if parameters are appropriate.
CAPM Quantifies Risks and Expected Returns
The capital asset pricing model (CAPM) establishes the quantitative relationship between investment risks, measured by the systematic beta relative to market returns, and expected returns to compensate for risks taken. CAPM provides a framework for investors to evaluate if an investment’s expected return is reasonable given its risk level.
Fama-French Models Capture More Risk Dimensions
Fama-French three-factor and five-factor models incorporate more risk factors like value, profitability and investment patterns to explain asset returns. These models help analyze impacts of various fundamental factors on investment returns.
Returns and Risk Analytics Support Decision-Making
Investment returns and risks modeling and analytics equip investors with vital tools to quantify expected returns considering risk parameters. Proper application would lead to informed investment decisions aligned with personal risk preference.
Evaluating investment returns must account for risk factors appropriately. Models like CAPM and Fama-French establish relationship between risks and expected returns, while measurements including risk-free rate, market premium and risk ratios quantify risks. Investors shall master these techniques to support investment analysis and decisions.