Common Measures Of Return

Question 1

A useful property of continuously compounding rates of return is that they are

Answer 1

additive for multiple periods.

That is, a continuously compounded return from t=0 to t=2 is the sum of the continuously compounded return from t=0 to t=1 and the compounded return from t=1 to t=2

Question 2

Gross return refers to the

Answer 2

Total return on a security portfolio before deducting fees for the management and administration of the investment account

Question 3

Net return refers to

Answer 3

the return after the management and administration fees have been deducted

Question 4

Commissions on trades and other costs (not including mgmt and admin fees are

Answer 4

deducted in both gross and net return measures

Question 5

Pretax nominal return refers to

Answer 5

the return before paying taxes

After-tax nominal return refers to the return after the tax liability is deducted

Question 6

Real return is the

Answer 6

Nominal return adjusted for inflation

Question 7

Real return measures the

Answer 7

increase in an investor’s purchasing power.

If she invests and earns 7% but the cost of goods goes up 2%. Her real return is 1.07/1.02 =1.049 (4.9% being her real rate of return for the year)