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Calculating Stock Returns (Applied Python)

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41 views

Calculating Stock Returns (Applied Python)

Uploaded by

vkvyddr846
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Calculating Stock

Returns (Applied)

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Recap: Return of a stock

$%&' + )*+%&' − $% $%&' + )*+%&'


!" = ≡ −1
$% $%

Where:
!" = Return on a stock j
$% = Price of the stock at time t
$%&' = Price of the stock at time t+1
)*+%&' = Dividend paid at time t+1

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Note on Notations

You can use alternative notations, as long


as you’re consistent.

$%&' + )*+%&' $% + )*+%


!" = −1≡ −1
$% $%/'

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Calculating Returns
Python Walkthrough

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Calculating Returns on Python

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Returns vs. Expected Returns

When we invest in stocks, we base our


decision on the expected return instead of
the realised return.

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Returns vs. Expected Returns

In other words, we base it on what we


expect the stock will earn us in the future.

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Expected Return

We can estimate the expected return by...


ü Using the stock’s historic average return.
ü Using state-contingent weighted probabilities.
ü Using Asset Pricing Models (e.g. CAPM)

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Over the next few videos, we’ll learn how
to estimate expected returns using all 3
approaches.

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Summary

We can calculate returns on Python using:


§ df[‘returns’] = df[‘price’] / df[‘price’].shift(1) – 1
§ df[‘returns’] = df[‘price’].pct_change(1)

While prices may appear “predictable”, they’re not since returns follow
a ‘random walk’.

Importantly, we base our investment decisions on expected returns,


not returns.

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Now have a go
at the quiz!

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