# Investments: Measuring Return Flashcards

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1
Q

Holding Period Return

A
• 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
2
Q

Holding period Return Cont.

A

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.

3
Q

Holding Period calculation with cash flows

A
4
Q

Effective Annual Rate

A

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

5
Q

Effective Annual Rate - Example

A
6
Q

Arithmetic Average (mean)

A
• 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.
7
Q

Geometric Average (geometric mean) - price of something

A
8
Q

Geometric Average (mean) - rate of return

A
• also a time weighted compounded rate of return.

- is the compounded rate of return.

9
Q

Weighted Average

A
• 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.
10
Q

Weighted Average Share price

A

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

11
Q

Weighted Average Portfolio Return

A

Several factors must be taken into account:

1. Current market value of securities held.

2 the total portfolio value

1. The return of each security throughout the period in question.
12
Q

Weighted Average Portfolio Beta

A

Same as weighted average portfolio return

13
Q

Net Present Value (NPV)

A
• 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
14
Q

Internal Rate of Return (IRR)

A
• 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

15
Q

Dollar-Weighted Return

A
• Calculate IRR using investors cash flows

- the method is the same

16
Q

Dollar Weighted Return

A

Calculate IRR using investors cash flows

17
Q

Time-weighted Return

A
• mutual funds report on time weighted basis (tested)
• calculates IRR using the securities cash flow.
• only concerned with the growth of a single share or single purchase.
• determined without regard to investors cash flow
18
Q

Arbitrage Pricing Theory (APT)

A
• asserts pricing imbalances cannot exist for any significant period of time; otherwise investors will exploit the price imbalance until the market prices are back to equilibrium.
• Multi factor model that attempts to explain return based on factors
• inputs are factors (F) such as inflation, risk premium and expected returns and their sensitivity (b) to those factors
• standard deviation and beta are not inputs variables to the APT.