Measures of Investment Returns Flashcards
Holding Period Return
(Pe-Pb+D)/Pb
Arithmetic Mean
(a1+a2+a3+…an)/n - not as meaningful if volatile
Geometric Mean
(n root of (1+r1)x(1+r2)x…(1+rn))-1
Total return components
Capital appreciation/depreciation and dividends/interest
After tax return
Total Return * (1-tax bracket)
Real (Inflation adjusted) return
((1+rate of return)/(1+rate of inflation))-1
YTM
PV of all future cash flow/compounded rate of return of a bond
YTC
Yield up to first date that the yield can be called
Terminal value
sum of the maturity value and FV of the coupon payments reinvested at a rate chosen by investor
TEY
r/(1-t)
Current yield
Coupon Interest in Dollars/Bond’s current Market Price
Dollar weighted average
(r)=semi-annual rate of return
Annual return
(Dollar weighted average + 1) squared - 1
The “compound average rate of return” is also known as the
The compound average rate of return (geometric return) is similar to the arithmetic mean return, except the geometric return, because it does take compounding into account, will always be less than the arithmetic return. The compound average rate of return is also called the geometric mean return (GMR), where the GMR is computed over n successive time periods.
When making an investment decision on a bond, the investor should consider which yield?
Yield to Worst (YTW) is the appropriate yield you consider when evaluating fixed income.
Difficulties are encountered when deposits or withdrawals occur sometime between the beginning and end of the period. One method that has been used for calculating a portfolio’s return in this situation is the ____________ return.
Dollar-weighted return is what an investor should use to determine how well their investment performed.
Place the following yields in order from lowest to highest on a discount bond.
Yields on a discount bond, from lowest to highest, are as follows:
Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
https://learn.bostonifi.com/content/course/421/lesson/1605/content/32656
Over a period, the S&P 500 returned 11%. During the same period, the risk-free rate of return was 0.5%. If a portfolio manager returned 9% while maintaining a Beta of 0.64 to the S&P 500, did they provide an adequate amount of return given the risk they assumed?
αp = 0.09 − [0.005 + (0.11 − 0.005) 0.64]
αp = 0.09 − 0.0722
αp = 0.0178 = 1.78%
A positive alpha indicates outperformance.
An investor purchased a AAA-rated bond with a 4.5% coupon at par. Several months later, comparable market yields have increased. The current yield on the bond is 5.25%. Identify the Yield to Maturity (YTM).
This question describes a discount bond. Yields on a discount bond, from lowest to highest, are as follows:
Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
Since the Current Yield on the discount bond is 5.25, the Yield to Maturity must be higher. Therefore, the only viable option is 5.50%.
Beatrice purchased 200 shares of BIFi, a blue-chip stock, for $2,750. BIFi stock is currently paying $75 of annual dividend income to Beatrice. Dividends are expected to grow 5.5% annually. Beatrice has a required rate of return of 6%.
Identify the intrinsic value of the BIFi.
Use constant growth dividend discount formula to solve.
V=D1/(r−g)
V = Value (intrinsic)
D1 = Dividend (D0 x (1 + g))
r = Required rate of return
g = fixed, stable growth rate
$75 ÷ 200 = $0.375 dividend/share
V= (0.375(1.055))/(0.06−0.055)
$79.12= 0.3956/0.005
Over a 3-year period, Angus makes the following purchases of GrowCo stock:
Beginning of Year 1: Buy 100 shares at $50/share Total shares owned: 100 End of year 1 Total FMV: $6,000
Beginning of Year 2: Buy 100 shares at $60/share Total shares owned: 200 End of year 2 Total FMV: $14,000
Beginning of Year 3: Buy 100 shares at $70/share Total shares owned: 300 End of year 3 Total FMV: $24,000
GrowCo did not pay any dividends over the holding period.
If Angus liquidates his position in GrowCo at the end of year 4 at a FMV of $24,000, which of the following statements is CORRECT?
The money-weighted return for GrowCo is 16.00%.
The dollar-weighted return
(5,000), CF0
(6,000), CF1
(7,000), CF2 4, N
$24,000, CF3
Solve IRR
0.16, or 16%
The time-weighted return
(50), PV
80, FV
Solve I/YR
0.1247, or 12.47%
Citigroup (C) has a beta to the S&P 500 of .92. If the S&P 500 is expected to return 12% while T-bills are yielding 1%, what would be Citigroup’s stock premium?
StockPremium i=(.12−.01).92=.1012=10.12%
