Measure Of Investment Returns

Question 1

What is Simple Interest?

Answer 1

Money earned by investing as some money for a specific.

Interest = principle x interest rate x time

Question 2

What is compound interest?

Answer 2

Interest earned on interest

Simple time value of money problem

Question 3

What is holding Period Return?

Answer 3

Basic method to evaluate the rate at which an investment grows or declines overtime

Question 4

What is the formula for holding Period return?

Answer 4

Question 5

What is the ARITHMETIC MEAN And what is it formula?

Answer 5

Approximation of the earnings rate for investment overtime

Question 6

What is the geometric mean and what is the formula?

Answer 6

Average compounded return of the internal rate of return annualized

Question 7

Why do the geometric mean and the arithmetic mean differ?

Answer 7

Arithmetic mean and geometric mean difference is that the arithmetic mean does not consider the compounding effect of returns

Geometric mean will always be less unless they are both 0

Question 8

What does the expected rate of return do?

Answer 8

Helps investors decide where to invest their funds

Question 9

What is the formula for expected rate of return?

Answer 9

Question 10

What is the realized rate of return?

Answer 10

Actual rate of return

Question 11

What is the nominal annual percentage rate? (APR)

Answer 11

Yearly cost of funds expressed as a percentage

It’s not take compounding into consideration

Note - if lender advertises a 1.25% monthly rate, the APR is 1.25% x 12 = 15%

Question 12

What is the effective annual rate? (EAR)

Answer 12

Annual percentage rate taking into consideration the impact of compounding

Provides the annual rate of interest of an investment or debt when compounding occurs more than once per year

Question 13

What is the formula for effective annual rate? (EAR)

Answer 13

Question 14

What is the internal rate of return?

Answer 14

Earnings rate at which the present value of a series of cash flows from an investment will equal its cost

Question 15

What is the time weighted return?

Answer 15

Measures the rate of return without considering an investors deposits or withdrawals

Preferred method for analyzing the performance of a portfolio manager and mutual funds

Question 16

What is a dollar weighted return?

Answer 16

Provides an assessment of an investor’s actual performance, including deposits and withdrawals rather than a portfolio manager

Question 17

Investment returns, preferably after tax should be compared to what?

Answer 17

Some sort of benchmark example S&P 500 index

Question 18

An investment should be judged on the fact it’s return is not only better than a more conservative investment, but is also better on a what?

Answer 18

Risk adjusted basis as well

Question 19

How is a risk adjusted return calculated?

Answer 19

Dividing the actual return by the beta and the investment

Treynor, Sharpe, and Jensen performance measures are methods of comparing as risk adjusted returns

Question 20

What is a weighted average return?

Answer 20

Why did average return represents the return for a set of securities such as a portfolio, where each return is waited by the proportion of the security to the entire group or portfolio

Question 21

How do you calculate weighted average return of a portfolio?

Answer 21