Chapter 3 - Measuring Return

Question 1

Weighted Average Portfolio Return

Answer 1

Takes into account # of shares of each priced security

• Several factors taken into account:
  1) FMV of security
  2) TPV - Total Portfolio Value
  3) Return of each security throughout period in question

Question 2

Net Present Value (NPV)

Answer 2

• Evaluates capital expenditures that will result in differing cash flows over useful life.
• NPV = PV of Cash Flows - Initial Cost

If NPV = 0: invest! ; IRR = Discount Rate
If NPV positive: invest! ; IRR > Discount Rate
If NPV negative: DONT invest

IRR: Internal Rate of Return:
- compounded rate of return
- calculate when have uneven cash flows and are asked to calculate a compounded rate of return

Question 3

Dollar-Weighted vs Time-Weighted Return

Answer 3

Dollar-Weighted Return
- Calculates IRR with investor’s cash flows
- Takes into account additional share purchases as it is concerned with investor return

Time-Weighted Return:
- Calculates IRR using security’s cash flows
- NOT take into account additional share purchases.
Concerned with the growth of a single share/purchase

*Exam Tip: know distinctions btwn. Will not have to calculate

Question 4

Arbitrage Pricing Theory (APT)

Answer 4

• Pricing imbalances cannot exist for significant period of time.
• ATP tries to take advantage of pricing imbalances
• Multi-factor model attempting to explain return based on factors (F). Factors include - inflation, risk premium, & expected returns
• If factor = 0, then no impact on return

**Exam Tip: know the keywords:
- multi-factor model
- sensitivity to those factors
- Std Dev & Beta are NOT inputs