Chapter 19- (3Qs) Performance Measures Flashcards
Current Yirled vs Yield to Maturity
Current Yield =
annual income stream /
Current market price
Yield to Maturity =
Annual dividend - (Premium/years to maturity) /
Average price
Better reflects actually performance of a bond being purchased on secondary market
Total Return
Capital appreciation plus income (dividend or interest)/ Price at beginning
YTM also measures Total Return
Holding Period Return
Total Return for a given period not annualized
If rates are falling, the holding period return will be below the YTM calculated on a bond due to reinvestment
Annualized Return
Annualization factor- number of months in a year / number of months an investment is held
30% gain over 18 months is annualized return of 20%
Due to compounding this isnt exact
Inflation Adjusted Return (Real Return)
Reduce the nominal rate of return by CPI for Debt securities
Reduce Total Return by CPI
After tax inflation adjusted would require for the tax paid to be reduced as well
Probable Return
Gives a mean of potential returns
15% of a 20% return
70% Chance of a 15% return
15% chance of a 10% return
Risk adjusted return
Overall return - risk free rate (90 day t bill)
/
Standard deviation of portfolio
Amount of return per unit of risk taken
Higher Sharpe, the better the return
Risk Premium Components
2 Components
Internal Risk Factors including:
Business Risk, Credit Risk, Liquidity Risk, currency risk, and country risk
External Risk Factors:
Market risk, interest rate risk
Internal Rate of Return
Preferred method of measuring risk in a DPP
Takes into consideration TVM
Yield to Maturity of a bond
Time Weighted vs Dollar Weighted Return
Time Weighted Returns- Evaluating manager without influence of cash flows
Dollar Weighted Returns- IRR Based on cash flows in and out of portfolio (Investors actual return)
Indexes
Indexes are generally weighted by the overall capitalization of a company
Larger traded companies effect the index more greatly
Large Cap- S&P 500
Mid Cap- S&P 400
Small Cap Russell 2000
International Stocks- EAFE
Dow Jones Industrial Average
Top 30 Industrial Stocks
Publishes the WSJ
Price weighted average of one share of each stock within the index
Includes popular names like Microsoft, Intel and Apple
S&P 500
400 Industrials
20 transportation companies
40 public utilities
40 Financial institutions
NYSE
Composite index of all stocks listed on NYSE
3000 different companies
Nasdaq Composite Index
3000 OTC companies
Cap-weighted
