Unit 4 - Session 19 Flashcards Preview

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Flashcards in Unit 4 - Session 19 Deck (17):

Current Yield on Investment

Annual income stream (interest and dividends) divided by the current market price. Debt securities annual is always fixed as a percentage of par and does't fluctuate when the market price of the security changes.

Example: A bond with a 5% coupon always pays $50/yr. If the market price on a bond is 80 ($800), the current yield is 6.25% (50 divided by 800).

Stock yields are given in dividends and usually appear on a quarterly basis. To find the annual yield, multiply by the dividend by 4 to arrive at the annual dividend.


Total Return

Includes the income from dividends and interest plus any capital appreciation (or less capital appreciation) over a given time period, usually one year.

For Bonds the Total Return is YTM (which is the bond's IRR)


Holding Period

The length of time an investor holds an investment


Hold Period Return

The return received during the hold period. Total return income plus capital appreciation (can be calculated at anytime where is total return is usually calculated annually).


Annualized Return

Return an investor would received had he held an investment for one year. Actual return by annualization factor (the number of months in the year divided by the number of months an investment is held).


Real Rate of Return

returns that have been adjusted for inflation. Reduce the nominal return by the inflation rate, as reflected in the CPI.

Example: If a bond has a 8% coupon and the CPI is 3% the inflation-adjusted return is 5%.

If an equity has a total return of 25% and the CPI was 6% the real rate of return would be 19%.

Calculate inflation-adjusted and after tax return =
(1 + the return) / (1 + the inflation rate) - 1.

shorthand way to approximate the real rate of return is to reduce the return amount of inflation during the period


After-Tax return

aka adjusted return reduces the investment's return by the client's tax rate. If an investor receives a 10% return and is in the 25% tax bracket the tax bracket is calculated by multiplying the return by (1 - .25) or .75 for a 75% of the 10% return for 7.5% after-tax return.


Probably Returns

Estimates of the likely returns and investment may yield. Expected or Probably return = (probability of return #1 x possible return #1) + (probability of return #2 x possible return #2)


Sharpe Ratio

Measures the risk-adjusted return. Measures the amount of return per unit of risk taken. the higher the ratio, the better or more return per unit of risk taken. Subtracts the risk-free rate from the overall return of the portfolio divided by the standard deviation of the portfolio.


Risk Premium

Premium demanded for internal and external risk factors. Internal risks included: business risk, credit risk, liquidity risk, currency risk, and country risk. External risk factors include: market risk, interest risk, macroeconomic in nature and non-diversifiable.


Internal Rate of Return (IRR)

Preferred method of measuring the return on a DPP; take into consideration the time value of money; is the way YTM of a bond is computed.


Time-Weighted returns

Use to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals


Dollar-Weighted Returns

used to determine the rate of return an individual investor earned on the basis of the investor's particular cash flow into and out of a portfolio


Index Benchmarks

Large Cap - S&P 500
Mid Cap - S&P 500
Small Cap - Russell 2000
International Stocks - EAFE


Dow Jones Industrial Average (DJIA)

30 industrial stocks - 30 best known corporations in the world. Price weighted so it is an average


Standard & Poor's 500

Four main groups of securities: 400 industrials, 20 transportation companies, 40 public utilities, and 40 financial institutions. Cap weighted index using a base period of 1941-43 equal to 10



Publishes a composite index that covers all of the common stocks listed on the NYSE, more than 3,000 different companies. Provides the most comprehensive measures of market activity. Cap weighted, based on 12/31/1965 and the index for that base is 50