Measure Of Investment Returns Flashcards
What is Simple Interest?
Money earned by investing as some money for a specific.
Interest = principle x interest rate x time
What is compound interest?
Interest earned on interest
Simple time value of money problem
What is holding Period Return?
Basic method to evaluate the rate at which an investment grows or declines overtime
What is the formula for holding Period return?
What is the ARITHMETIC MEAN And what is it formula?
Approximation of the earnings rate for investment overtime
What is the geometric mean and what is the formula?
Average compounded return of the internal rate of return annualized
Why do the geometric mean and the arithmetic mean differ?
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
What does the expected rate of return do?
Helps investors decide where to invest their funds
What is the formula for expected rate of return?
What is the realized rate of return?
Actual rate of return
What is the nominal annual percentage rate? (APR)
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%
What is the effective annual rate? (EAR)
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
What is the formula for effective annual rate? (EAR)
What is the internal rate of return?
Earnings rate at which the present value of a series of cash flows from an investment will equal its cost
What is the time weighted return?
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
What is a dollar weighted return?
Provides an assessment of an investor’s actual performance, including deposits and withdrawals rather than a portfolio manager
Investment returns, preferably after tax should be compared to what?
Some sort of benchmark example S&P 500 index
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?
Risk adjusted basis as well
How is a risk adjusted return calculated?
Dividing the actual return by the beta and the investment
Treynor, Sharpe, and Jensen performance measures are methods of comparing as risk adjusted returns
What is a weighted average return?
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
How do you calculate weighted average return of a portfolio?
