1: HPR, PPR, Mean Returns

Question 0

What can periodic payments be comprised of?

Answer 0

Periodic payments include:

1. interest,
2. rents,
3. royalties, and
4. dividends

Question 1

Which 2 factors are involved in determining an investment’s overall return?

Answer 1

Determining an investment’s overall return involves:

1. Periodic payments
2. Changes in market value (price appreciation or decline)

Question 2

What is an HPR?

Answer 2

HPR means “Holding Period Return.”

1. It is the most basic measure of return
2. HPR relates the profit on an investment directly to its beginning value.

Question 3

How is HPR calculated?

Answer 3

HPR = (Income Received + Change in Value) / Beginning Value

Question 4

What does HPRR?

Answer 4

HPRR mean “Holding Period Return Relative” and is closely related to the HPR.

Question 5

How is HPRR calculated?

Answer 5

HPRR = (Income received + Ending value) / Beginning Value

Question 6

What is the key difference between HPR and HPRR?

Answer 6

The key difference between the HPR and the HPRR is that

• HPR uses the CHANGE in market value,
• HPRR uses the ENDING in market value.

REMEMBER: HPRR = 1 + HPR

Question 7

What does “ex post” mean?

Answer 7

“ex post” means after the fact (historic)

Question 8

What does “ex ante” mean?

Answer 8

“Ex ante” means before the fact (forecasted)

Question 9

What does PPR mean?

Answer 9

PPR means Per-Period Return

Question 10

How is PPR calculated?

Answer 10

Per-Period Return

PPR = (Period’s income + Period’s change in value) / Beginning-of-period value

Question 11

In what 3 ways does the PPR differ from HPR?

Answer 11

The PPR differs from the HPR in 3 ways:
1) the income is for a single period
2) the price change is the price change for the single period
3) the denominator is the value of the investment at the start of the period and not at the time the investment was purchased.

Question 12

How is PPRR calculated?

Answer 12

PPRR = 1 + PPR

Question 13

What is a simple return?

Answer 13

Simple return
-income accrues only on the principal and not on prior income.

Ending value = Beginning value * [1 + (rate of return * t)]
Where t = the number of time periods

Question 14

What is a compound return?

Answer 14

Compounding Return
-the income for each period is added to the principal so that subsequent income is paid on both principal and accumulated income.

Ending value = Beginning value * (1 + rate of return)^t

Question 15

What is an “Arithmetic Mean Return” (a.k.a. arithmetic average)?

Answer 15

Arithmetic Mean Return (a.k.a. arithmetic average)

-(symbol R) computed by summing all of the observations and dividing by the number of observations.

The arithmetic mean return is an erroneous method for determining the annualized rate of return for multiple time periods.

Question 16

What is a GMR?

Answer 16

GMR means Geometric Mean Return

It is the correct method for calculating the annualized rate of return for multiple time periods.
It is the GMR number that will generate the actual dollar performance of an investment and not the AMR.

Question 17

What are the 4 steps for calculating GMR?

Answer 17

4 Steps for computing the GMR:
1) Convert PPR’s to PPRR’s.
2) Multiply the PPRR’s together to get a HPRR
3) Compute the T-root of the HPRR, where T is the number of periods.
4) Subtract one.