lecture 6 Flashcards
rate of return
change in asset value + cash flow from asset
cash flow yield + capital gain
Interest rate risk
the risk of interest rates changing as we hold the asset (bonds)
when is interest rate risk higher
when we hold a bond with a longer maturity
when is there no interest rate risk
when the time to maturity matches the holding period
the HPR (holding period return) limits us to only getting the return for one period
what are the other terms we can use to get returns from multiple periods?
the Money-Wighted rate of Return (MWR)
The Time-Weighted Return (TWR) (geometric average)
Tax-adjusted HPR
the Money-Wighted rate of Return (MWR)
we use IRR to account for all cash flows
PV outflows = PV inflows
basically, we find the discount rate that will equate all cash inflows and outflows
The Time-Weighted Return (TWR)
basically, the geometric average
measures the compounded rate of forth of $1 initially invested in the portfolio over stated measurement period
arithmetic average
giveth average of each period’s return does not include compounding
easier to calculate
why do negative returns have a bigger impact for the geometric average than the arithmetic average?
because the geometric average has compounding
why is the geometric average more realistic than the arithmetic average?
because it includes returns of past periods
–> compounding
in Canada, if we make capital gains, how much can be subject to tax?
50% of the capital gains are subject to tax
