Measures of Investment Return

Question 1

Geometric Average Return

Answer 1

• the average compounded rate of return per year over a multiyear period.
• the best measure of an investment over time
• most commonly used when evaluating the performance of portfolio managers since it uses a base of constant dollars.

Question 2

Time-Weighted Return

Answer 2

• determined without regard to any subsequent cash flows of the investor and uses the geometric mean in computing the overall return.
• measure of the investment over time
• sometimes referred to as the return on the investment,

Question 3

Dollar-weighted return

Answer 3

-determined using the subsequent contributions to and withdrawals from the investment by the particular investor and uses the arithmetic return in deriving the overall return.
-measures the investors annual rate of return
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Question 4

Arithmetic Average Return

Answer 4

• the return of an investment in an average year over a multiyear period.
• best used as a measure of average performance over a single period.

Question 5

Real Return

Answer 5

-the return of an investment after accounting for annual inflation

Question 6

Nominal Return

Answer 6

-an investments states or before-tax and before-inflation rate of return for a given period.

Question 7

Holding Period Return

Answer 7

• illustrates the total return of the investment for the given period over which the investment is owned.
• it Fails to consider the timing of when the cash flows actually occurred and hence the time value of money.
• if calculating for more than one year, it overstates its true return on an annual basis. If under a year it understates.

Question 8

Net Present Value (NPV)

Answer 8

-the difference between an investment’s market value and its cost.

Question 9

Internal Rate of Return (IRR)

Answer 9

-the rate of return that equates the present value of all an investments cash inflows with the present value of its outflows, producing a new present value between the town of them of zero.

Question 10

Yield to Maturity

Answer 10

• considers the current income generated by the bond as well as the change of its value from its purchasing price to the price at maturity.
• When the bond is selling at a premium the YTM will be less than the coupon rate.
• When the bond is selling at a discount the YTM will be more than the coupon rate.

Question 11

Yield to Call

Answer 11

• The return on a bond that is held until it is called or retired by the issuer.
• When the bond is selling at a premium the YTC will be greater than the YTM.
• When the bond is selling at a discount the YTC will be less than the YTM.