LOS 1.d

Question 1

How to calculate an annualised return

Answer 1

(1 + HPR) ^ 365/days - 1

Question 2

How to work out the formula for a PV of a FV cash flow

Answer 2

PV = FV(N) (1 + r/m)^–mN

where:

r = quoted annual interest rate

N = number of years

m = compounding periods per year

Semiannual compounding: m = 2
Quarterly compounding: m = 4
Monthly compounding: m = 12
Daily compounding: m = 365

Question 3

What is the Rcc and how to calculate

Answer 3

What is the Rcc: This expresses the return as if the growth happened continuously throughout the period. It’s like observing the plant’s growth under a time-lapse camera – you see the continuous growth process, not just the start and end points. It uses the natural logarithm to convert the HPR into its continuous compounding equivalent.

How to calculate: ln (1+HPR) = (ending value / beginning value)

Question 4

What is the Gross Return, Net Return, Pretax nominal Return, After Tax-Nominal Return, and Real Return

Answer 4

• Gross return = total return before deducting fees for management and admin of investment account
• Net Return = return after feees for management and admin of investment account have been deducted
• Pretax nominal return = return before paying taxes (Dividend income, interest income, short term capital gains, long term capital gains)
• Real return = Nominal return adjusted for inflation

Question 5

What is real return and how do you calculate it

Answer 5

• Definition: measuring increase in investors purcahsing power, how much their investment has increased, along with the change in their purchasing power
• Calculation: (1+nominal risk-free rate)(1+risk premium) / (1+inflation premium)