# Measures of Investment Return Flashcards

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1
Q

Geometric mean

A

Good measure of change in wealth over time.

1. Add 1 to decimil returns (or subtract if negative return)
2. Multiply the returns
3. Enter that as FV
4. 1 CHS is PV
5. N = number of years supplied for
6 Solve for i

used to evaluate performance of fund manager…not affected by cash flows.

2
Q

Time Weighted Return

A

investment performance as a percentage of capital at work (income and price changes)

Eliminates the effects of additions and withdrawals

Used for investment performance!!

3
Q

Dollar Weighted Return

A

changes in total dollar value. Additions and withdrawals are treated as part of the return along with income, cap gains and losses.

Same as IRR/NPV calc

4
Q

Nominal Rate of Return

A

Actual rate earned over a period of time

5
Q

Real Rate of Return

A

RRR = 1 + return
—————- -1
1 + inflation

6
Q

Total Return

A

annual return including interest and dividends

7
Q

A

return that is altered for differences in risk among variables.

8
Q

Holding Period Return

A

total return over a period of time from purchase to end of period sale divided by price paid. (income plus price appreciation, dividends, minus margin)

Fails to consider timing of when cash flows occurred

Price sold + dividends - price paid (times .85 or.80 for after tax)
___________________________
Price paid

50% margin \$10,000 means only paid \$5000
subtract margin, cost and interest

9
Q

Internal Rate of Return

A

Discount rate
rate at which net present value of future cash flows equals the cost

when cash flow is 0 the discount rate is IRR

When IRR is greater than required return the investment is acceptable

CFO, CFJ, f IRR

10
Q

Yield to Maturity

A

Yield an investor can expect if bond held to maturity

takes in to account market price and, cap gain, or loss,

ALWAYS USE SEMIANNUAL COMPOUNDING!!! (unless problem says use annually)
(even with zero coupon)

YTM = -PV, FV, PMT(/2), N(x2), = i(x2)

11
Q

Yield to Call

A

Assumes bond will be redeemed on first call date by issuer

```PV= price paid
FV = call price
PMT= coupon/2
N= years x2
1 = interest x 2```
12
Q

Current yield

A

takes into account the current market price of the bond

CY = Annual Interest in \$
_______________

`     Bond's Current Price`
13
Q

Tax Equivalent Yield

A

TEY = Tax Equivalent Yield
————————–
1- Marginal Tax Rate

Tax EXEMPT yield = Corporate Rate X (1-Marginal tax bracket)