Chapter 22 (4 questions) Flashcards
Performance Measures (19 cards)
Total Return
income from dividends or interest plus any capital appreciation (or less any capital depreciation) over a given time period, usually one year. As such, total return is considered to be the best measure of how a security has performed for an investor.
Total Return for Bonds
Yield to Maturity is the Total return on a bond if held to maturity, otherwise it is the coupon plus any income plus any appreciation or less any depreciation
Total Return for Stocks
use the dividend income plus or minus the appreciation or depreciation to calculate total return
current return calculations (Mutual Fund)
based only on income distributions for the past 12 months divided by the current per-share price: annual dividend ÷ current price = current yield
Holding Period Return
The length of time an investor owns an investment is called the holding period. The return for that period is called the holding period return (HPR). HPR is the total return, income plus capital appreciation, of an investment over a specified period, the holding period. It is essentially the same as the total return, but, whereas the total return is usually computed on an annual basis, the holding period return can be for any period.
Annualized Return
the return an investor would have received had he held an investment for one year. Annualized return is determined by multiplying the actual return by an annualization factor. The annualization factor is the number of months in the year divided by the number of months an investment is held.
annualization factor
the number of months in the year divided by the number of months an investment is held
Inflation-Adjusted Return (Real Return)
Returns that have been adjusted for inflation
Determine the Inflation-Adjusted Return (Real Return) By
To determine the inflation-adjusted rate of return of an equity security, reduce the total return (income from dividends or interest plus any capital appreciation (or less any capital depreciation) over a given time period) by the inflation rate as reflected in the CPI.
How to Calculate return on a TIPS Bond
Two thing to remember:
1) Every six months, the principal value is adjusted by the change to the cost of living as measured by the CPI
2) the semiannual interest payment is calculated by multiplying one-half of the annual coupon times the adjusted principal
After-Tax Return/Yield
determined by reducing the investment’s return by the client’s tax rate
Probable Return
estimates of the likely returns an investment may yield. To determine the probable return of an investment, the adviser assigns a probability to each return that the investment is likely to earn and then multiplies that return by the probability of it occurring. The sum of those probable returns is the expected return for that investment. The formula is as follows: expected or probable return = (probability of return #1 × possible return #1) + (probability of return #2 × possible return #2).
Risk-Adjusted Return (Sharpe Ratio)
the ratio is calculated by subtracting the risk-free rate (e.g., the 91-day Treasury bill rate) from the overall return of the portfolio. This result, which is the portfolio’s risk premium, is then divided by the standard deviation of the portfolio. This ratio measures the amount of return per unit of risk taken. The higher the ratio, the better or more return per unit of risk taken.
1)the actual return, minus;
2)the risk-free rate (the 91-day T-bill rate), divided by;
3)the standard deviation.
Beta is not a part of this ratio.
***Popular way of measuring a security’s return vs the Risk Taken
Internal Rate of Return (IRR)
-IRR is the preferred method of measuring the return on a DPP;
-IRR takes into consideration the time value of money; and
-IRR is the way the yield to maturity of a bond is computed.
Time-Weighted Returns
determined without regard to any subsequent cash flows of the investor. it measures the performance of the investment over a period of time (and not of the investor as in a dollar-weighted approach). Most returns reported on mutual funds are time-weighted because the portfolio manager does not have any control over the future cash flows to the fund with respect to investor dollars.
Dollar-Weighted Returns
considers subsequent contributions to and withdrawals from an investment, including sales of, for example, stock. As a result, the dollar-weighted approach focuses on the return of the investor (not the investment, as in the time-weighted approach) over a period of time, and usually results in a rate of return different than the time-weighted method. Best Ratio for determining Portfolio Manager Performance
Dow Jones Industrial Average
AVERAGE WEIGHTED Dow Jones & Company also publishes The Wall Street Journal, because the 30 industrial stocks are among the 30 best-known corporations in the world
Standard & Poor’s 500
S&P 500 is CAP WEIGHTED Composite Index includes four main groups of securities: 400 industrials, 20 transportation companies, 40 public utilities, and 40 financial institutions. The S&P 500 is a cap-weighted index using a base period of 1941–1943 equal to 10. Although most of the stocks in the S&P 500 are listed on the NYSE, many of the highest priced issues—Alphabet (Google), Amazon, and Booking Holdings (Priceline)—are traded on the Nasdaq Stock Market.
New York Stock Exchange (NYSE) Index
