7.1 Measures of Investment Returns Flashcards
To measure the performance of an investment manager, which of the following methods of computing returns should be used?
The time-weighted return should be used to measure the performance of an investment manager.
What is a simple rate of return?
A simple weight of return for an investment is computed by dividing its total return by the number of years that the investor has held the investment. The simple rate of return ignores the time value of money.
What is the compound rate of return?
The compound rate of return for an investment assumes that all interim proceeds, such as interest and repayment of principal, are reinvested over the holding period.
What is the arithmetic mean?
The arithmetic is a non-compounded return, calculated by dividing the sum of the periodic returns by the total number of periods being evaluated.
The arithmetic mean is the same as the average, or mean, return.
What is the geometric mean?
The geometric return assumes compounding of returns.
Note: The geometric return will always be lower than the arithmetic mean, except when the returns for all periods are equal. The reason for this difference in percentage returns is that the arithmetic mean does not take into consideration the compounding effect of the returns.
What is time-weighted return?
A time-weighted return is determined without regards to any subsequent cash flows.
What is dollar-weighted return?
A dollar weighted return considers subsequent contributions to and withdrawals from an investment.
What is nominal rate of return?
The nominal rate of return of an investment is simply its stated rate of return for a given period without accounting for inflation.
What is the real rate of return?
The real rate of return takes inflation into consideration.
That is why the real rate of return is sometimes called the inflation-adjusted rate of return.
What is annual percentage rate (APR)?
APR is the yearly cost of funds expressed as a percentage. APR does not take compounding into consideration.
What is effective annual rate (EAR)?
The EAR is the effective percentage rate taking into consideration the impact of compounding.
What is total return ?
Total return includes the income from dividends or interest plus any capital appreciation over a given period of time, usually one year.
What is SEC yield?
SEC yield is a standardized calculation that the SEC requires mutual funds to report and allows investors to compare yields among various investments.
What is the holding period return?
The holding period return sometimes referred to as the single period return, is simply the total return of an investment for the given period over which the investment is owned.
