Part 2 — Corporate Finance

HPR = (ending price − beginning price + income/dividends) / beginning price. It captures both capital appreciation and income earned over the holding period as a single rate.

Expected return = Σ(probability of each outcome × return in that outcome). It is the probability-weighted average of all possible returns.

Arithmetic mean is the simple average of periodic returns and overstates multi-period growth; geometric mean is the compound average that reflects actual cumulative wealth. Geometric ≤ arithmetic, with the gap widening as volatility rises.

Variance is the probability-weighted average of squared deviations from the expected return; standard deviation is its square root and measures total (stand-alone) risk in the same units as return. Higher values mean greater dispersion/risk.

Coefficient of variation = standard deviation / expected return. It standardizes risk per unit of return, allowing comparison of investments with different expected returns; lower CV is preferred.

Diversifiable (unsystematic, firm-specific) risk can be eliminated by holding a well-diversified portfolio; nondiversifiable (systematic, market) risk affects all assets and cannot be diversified away. Only systematic risk is rewarded with higher expected return.