Posted in Finance, Accounting and Economics Terms, Total Reads: 301
Definition: Mean Return
It refers to the expected return from a portfolio of securities. In other words, it can be understood as the mean of all likely returns of the portfolio. Mean return is directly dependent on the risk of the portfolio and the risk aversion of the investor.
This implies that a risk-averse investor will demand a higher return for an investment which is riskier. This is the precise reason why fall in credit rating is detrimental for companies and sovereigns alike. This is because it triggers an increase in return expected by the creditors and hence the borrowing cost for the entity in question, shoots up.
The investor endeavors to maximize the mean return at each level of risk undertaken by him.
Relevant to this is that, the risk of a portfolio is given by the standard deviation of its returns.
In context of risk and return, the most important ratio is Sharpe ratio It is equal to (Mean Return- Risk free return)/ Standard deviation of Portfolio return. It is hence a measure of risk adjusted return