# Investments: Measuring Return Flashcards

Holding Period Return

- not a compound rate of return.
- there is no consideration for the time an investment was held.
- Memorize equation as it is not provided on the exam

Holding period Return Cont.

The examiners will typically not give you a straight holding period return because it is very straight forward.

Items that make the computation more difficult include:

Dividends received - make sure to add them to the numerator.

Margin interest paid - make sure to subtract from the numerator.

Taxes paid -

only do this if the question asks for the after-tax gain or loss. The taxes will be computed

based on the dividends received and any capital gains on the sale (short-term versus long-term). Taxes,

like margin interest, are subtracted from the numerator.

Purchased the securities on margin -

in the numerator make sure to subtract any interest paid. Also, in

the numerator you will include the total cost of the securities as a subtraction from the sales proceeds.

In the denominator you only include your equity in the trade.

Holding Period calculation with cash flows

Effective Annual Rate

Formula calculates the effective annual interest rate earned on an investment when the compounding occurs more often than once per year

Effective Annual Rate - Example

Arithmetic Average (mean)

- also known as the simple average, it is the sum of all numbers divided by the number of observations
- ignores compounding effect of returns over time.

Geometric Average (geometric mean) - price of something

Geometric Average (mean) - rate of return

- also a time weighted compounded rate of return.

- is the compounded rate of return.

Weighted Average

- can be used to calculate a weighted average share price, expected returns, beta, or duration.
- the process is the same regardless of what is being calculated.

Weighted Average Share price

-weighted average takes into account the number of shares of each various priced securities that are owned.

Weighted Average Portfolio Return

Several factors must be taken into account:

- Current market value of securities held.

2 the total portfolio value

- The return of each security throughout the period in question.

Weighted Average Portfolio Beta

Same as weighted average portfolio return

Net Present Value (NPV)

- used to evaluate capital expenditures that will result in differing cash flows over the useful life or investment period.
- NPV is 0 or positive the investor would make the investment
- NPV is negative the investor would not make the investment

Internal Rate of Return (IRR)

- discount rate that sets NPV formula equal to zero.
- used when you have uneven cash flows and you are asked to calculate compounded return.

If NPV is positive - IRR>Discount rate

If NPV is zero - IRR=Discount Rate

If NPV is negative - IRR

Dollar-Weighted Return

- Calculate IRR using investors cash flows

- the method is the same