CFP Investments - Measuring Return Flashcards
Holding Period Return formula. Is it compounded?
Sale Price - Invested Amount - Borrowed Amount - Interest Paid + Dividends/
Equity Invested
NOT COMPOUNDED
NO consideration for time
Effective Annual Rate (EAR)
Calculates the effective interest rate earned on an investment when the compounding occurs more often than once per year.
Formula: provided
Arithmetic Average/Mean (AM)
“Simple Average”
Sum of all numbers divided by the number of observations
IGNORES COMPOUNDING!
Geometric Average (GM)
Standard formula for finding the geometric mean for a set of observations
A weighted average can be used to calculate
a weighted average share price, expected returns, beta, or duration.
Weighted Average Price Per Share formula
of shares x Price per share /
Total number of shares
Weighted Average Portfolio Return
Fair market value /
Total Portfolio Value
x
% Return
of all securities
Weighted Average Portfolio Beta
Fair market value /
Total Portfolio Value
x
Beta
of all securities
Net Present Value is used for investments return to calculate what?
It is used to evaluate capital expenditures that will result in DIFFERING CASH FLOWS over the investment period.
Positive = make investment
Negative = don’t make investment
Dollar-weighted return
Calculate IRR using the investor’s cash flows
Time-weighted return
Who uses this type of return calculation?
Calculates IRR using the security’s cash flow.
Ignores additional shares purchased.
THIS IS HOW MUTUAL FUND REPORT!
Arbitrage Pricing Theory (APT)
Asserts that pricing imbalances cannot exist for any significant period of time
APT attempt to take advantage of pricing imbalances
MULTI-FACTOR model
Factor of 0 = no impact on the return
Examples of factors: Inflation, Risk premium, Expected returns
DOES NOT USE standard deviation nor Beta
Foreign Currency Translation step
- Convert US dollars to foreign current o DETERMINE COST
- COMPUTE RETURN (utilizing the holding period return calc)
- Convert foreign currency BACK TO US DOLLARS
