103-6 Measures Of Investment Returns

Question 1

Simple Rate of Return

Answer 1

For an investment – computed by dividing its total return (income earned plus capital appreciation divided by the original investment) by the # of years that an investor has held the asset
The computation results in an annualized noncompounded rate of return
Ignores the time value of money

Question 2

Compound rate of return

Answer 2

For an investment assumes that all interim proceeds, such as interest and repayment of principal, are reinvested (thereby generating additional return) over the holding period

Question 3

Arithmetic Mean

Answer 3

A noncompounded return, is calculated by dividing the sum of the periodic returns by the total # of periods being evaluated

Question 4

Geometric Mean

Answer 4

Assumes compounding of return
Will always be lower than the arithmetic mean, except when the returns for all periods are equal, in which case the geometric and arithmetic means will be equal
The reason for this difference in % returns is that the arithmetic mean does not take into consideration the compounding effect of the returns

Question 5

Time-Weighted Return

Answer 5

Determined without regard to any subsequent cash flows of the investor
Measures performance of the investment over a period of time

Question 6

Dollar-Weighted Return

Answer 6

Considers subsequent contributions to and withdrawals from an investment, including sales of, for example, stock
The dollar-weighted approach focuses on the return of the investor (not the investment, as in the time-weighted approach) over a period of time, and usually results in a rate of return different than the time-weighted method

Question 7

Nominal Rate of Return

Answer 7

Is an investment’s stated rate of return for a given period without accounting for inflation
This rate is the same as the coupon rate of a bond
If a taxable investment is at issue, the nominal rate also reflects before-tax rate of return

Question 8

Real Rate of Return

Answer 8

Takes inflation into account; that is why the real rate of return is sometimes called the inflation-adjusted rate of return

Question 9

Annual Percentage Rate (APR)

Answer 9

The yearly cost of funds expressed as a %

The nominal APR does not take compounding into consideration

Question 10

Effective Annual Rate (EAR)

Answer 10

The annual % rate taking into consideration the impact of compounding

Question 11

Total Return

Answer 11

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

Question 12

SEC Yield

Answer 12

Standardized calculation that the SEC requires mutual funds to report and allows investors to compare yields among various investments
This yield is based on the most recent 30-day period covered by the fund’s SEC filings and represents the interest and dividends earned during that particular period, after, expenses have been deducted

Question 13

Holding Period Rate of Return (HPR)

Answer 13

Sometimes referred to as the single period return
Simply the total return of an investment for the given period over which the investment is owned
The measurement has a major weakness because it fails to consider the timing of when the cash flows actually occurred

Question 14

Current Yield

Answer 14

The return represented by the amount of annual interest income paid in relation to the current market value of the bond

Question 15

Yield to Maturity (YTM)

Answer 15

Aka internal rate of return
The total return earned on a bond that is held to maturity
Major assumption when calculating YTM is that all interest payments on the bond are reinvested at the calculated YTM

Question 16

Yield to Call (YTC)

Answer 16

Takes into account the possibility that the bond may be called by the issuer before its maturity date
At times, the YTC may be higher than YTM for premium bonds w/ a premium call price