LOS 1.b

Question 1

How to calculate holding premium return? and If compound over multiple periods.

Answer 1

HPR = (end-of-period value / beginning-of-period value) –1
Compounded HPR = (1+HPR yr1) + (1+HPR yr2) + (1 + HPR yr3).. - 1

Question 2

(LOS 1.b) Average Returns - How do you work out arithmetic mean return and what is it used for?

Answer 2

Calculation: R(1)+R(2)+R(3)+R(n) / n
Used for: Simple average of periodic returns

Question 3

How do you work out Geometric mean and what is it used for?

Answer 3

Calculation: ^n√(1+R1) x (1+R2) …. x (1+Rn) - 1
Used for: Averaging rates of return, as it takes into account the effect of compounding

Geometric mean < arithmetic mean

^means the the nth root.

Question 4

How to get an annual return if the period is less than 1 year

Answer 4

change the n (the root number) to how many years, e.g. For the last four semiannual periods, the number of years are 2.

Question 5

How do you work out Harmonic mean and what is it used for?

Answer 5

Calculation: N / (1/R1) + (1/R2) + (1/R3)
Used for: To calculate average share costs from periodic purchased in fixed money account