Chapter 3 CAIA Flashcards
Continuous Compounding
Continuous compounding assumes that earnings can be instantaneously reinvested to generate additional earnings.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 45). Wiley. Edición de Kindle.
Discrete Compounding
Discrete compounding includes any compounding interval other than continuous compounding such as daily, monthly, or annual.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 45). Wiley. Edición de Kindle.
Log Returns
A log return is a continuously compounded return that can be formed by taking the natural logarithm of a wealth ratio
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 46). Wiley. Edición de Kindle.
Return Computation Interval
The return computation interval for a particular analysis is the smallest time interval for which returns are calculated, such as daily, monthly, or even annually.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 46). Wiley. Edición de Kindle.
Notional Principal
Notional principal or notional value of a contract is the value of the asset underlying, or used as a reference to, the contract or derivative position.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 48). Wiley. Edición de Kindle.
Return on Notional Principal
The return on notional principal divides economic gain or loss by the notional principal of the contract.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 48). Wiley. Edición de Kindle.
Fully Collateralised
Fully collateralized means that a position (such as a forward contract) is assumed to be paired with a quantity of capital equal in value to the notional principal of the contract.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 49). Wiley. Edición de Kindle.
What are the two components of return for a fully collateralised position
A fully collateralized position has two components of return:
(1) the change in the value of the derivative, and
(2) any return on the collateral.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 49). Wiley. Edición de Kindle.
Partially Collateralised Rates of Return
A partially collateralized position has collateral lower in value than the notional value.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 49). Wiley. Edición de Kindle.
Internal Rate of Return
The internal rate of return (IRR) can be defined as the discount rate that equates the present value of the costs (cash outflows) of an investment with the present value of the benefits (cash inflows) from the investment. Using the terminology and methods of finance, the IRR is the discount rate that makes the net present value (NPV) of an investment equal to zero.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 51). Wiley. Edición de Kindle.
The four types of IRR based on when cash flows are available
Lifetime IRR
Since Inception IRR
Interim IRR
Point to Point IRR
Lifetime IRR
A lifetime IRR contains all of the cash flows, realized or anticipated, occurring over the investment’s entire life, from period 0 to period T. In other words, if in the context of Equation 3.9, time period 0 is the inception of the investment and time period T is the termination of the investment, then the IRR is a lifetime IRR.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 53). Wiley. Edición de Kindle.
Since Inception IRRS
SINCE-INCEPTION IRRS: A since-inception IRR is commonly used as a measure of fund performance rather than the performance of an individual investment. The cash flows that would then be used in Equation 3.9 are aggregate cash flows of a fund rather than a single portfolio company. The terminal (time period T) cash flow in this case is the appraised value of the fund’s portfolio at time T rather than a liquidation cash flow. Interim cash flows represent actual fund-level cash flows from liquidated investments.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 53). Wiley. Edición de Kindle.
Interim IRRS
INTERIM IRRS: The interim IRR is a computation of IRR based on realized cash flows from an investment and its current estimated residual value. The key to an interim IRR is that generally T would not be the termination of the investment; thus, CFT is an estimated value rather than a realized cash flow. The interim IRR can be calculated on an investment purchased subsequent to its inception.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 53). Wiley. Edición de Kindle.
Point to Point IRRS
POINT-TO-POINT IRRS: A point-to-point IRR is a calculation of performance over part of an investment’s life. All cash flows are based on realized or appraised values rather than expected cash flow over the investment’s projected life. Although any IRR is calculated from one point in time to another, a point-to-point IRR would typically not be used to refer to a lifetime IRR.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 53). Wiley. Edición de Kindle.