Measures of Investment Returns

Question 1

What is the compound return on $100 over the following 10%, 5%, 8%. What is the average geometric return? What is the arithmetic average return?

Answer 1

Geometric = (1.1)(1.05)(1.08) 24.74/ 3 = 8.24
Arithmetic = 1.1+1.05+1.08/3 = 1.076 = 7.67%

Question 2

Returns that compound are also called what

Answer 2

Geometric

Question 3

Geometric uses multiplication whereas arithmetic uses

Answer 3

addition

Question 4

Dollar weighted return

Answer 4

actual dollar return returns experienced by investors who add or withdraw investment funds over time

Question 5

Dollar weighted return is the same thing as

Answer 5

IRR

Question 6

IRR gives you what rate on invested cash

Answer 6

the true annualized compounded rate of return. How much money was made/lost on ALL monies invested

Question 7

Buy a stock for $10, sell it in 3 years for $12, pay pays $.33 a year in dividends. What is the IRR?

Answer 7

PV = 10 CHS
FV = 12
PMT = .33
N = 3
I = 9.38%

Question 8

You buy 2 shares of a stock for $10 that pays $.33 dividend. At the end of year 1 you add 10 more shares at $11 and then sell at $12 the end of year 3. What is the IRR

Answer 8

C0 = -20
C01 = 10 * 11 = -110 plus .33 dividend from 2 shares = .66 + -110 = 109.34
C02 = 12 * .33 = 3.96
C03 = 3.96 + 12 * 12 = 147.96

20 CHS g CF0
109.34 CHS g CFj
3.96 g CFj
147.96 g CFj
f IRR

7.8372 or 7.84

Question 9

Time Weighted Rate of Return

Answer 9

Geometric average return of individual holding period returns HPR
= How much money was made or lost for each dollar invested

Question 10

CAGR Cumulative Annual Growth Rate

Answer 10

Annual compounded rate of return. Rate at which a lump sum, invested in an investment strategy at the beginning with no additions or subtractions, would have grown on average each year

Question 11

Risk Adjusted Return

Answer 11

investment returns which are modified by the level of risk taken to achieve the returns. When comparing 2 securities, need to adjust for risk so apples to apples comp can be made. Adjusted using standard deviation and beta. Coefficient of Deviation is a risk adjusted return.

Question 12

Holding Period Return

Answer 12

measurement expressed as a percent of return or loss, realized or expected, on an investment during a single period, usually one year

Question 13

3 Common ways returns are calculated over multiple periods

Answer 13

Arithmetic Avg/Mean Return = simple return
Dollar Weighted Return = IRR
Geometric Avg Rate of Return = Time Weighted Return

Question 14

Key reinvestment assumption on YTM

Answer 14

interest payments are reinvested at the YTM rate

Question 15

Yield To Maturity definition

Answer 15

IIR of a bond, which is yield earned on a bond from the time acquired to maturity date

Question 16

Yield to Call definition

Answer 16

IRR of a bond assuming it will be called, yield from when you acquire to when its called

Question 17

What is the current yield on a bond with a $100 coupon currently priced at $952?

Answer 17

100/952 = .105 = 10.5%

Question 18

What is the YTM on a bond with a $100 coupon priced at $952? Matures in 3 years?

Answer 18

Solve for I
PV = 952 CHS
PMT = 50 (100/2)
N = 6 (3 *2)
FV = 1000
I = 5.98 YOU NEED TO MULTIPLY BY 2
11.96%

Question 19

Current yield > YTM when bond price is

Answer 19

at a premium

Question 20

YTM > current yield when bond price is

Answer 20

at a discount

Question 21

Premium does what to YTM

Answer 21

reduces

Question 22

Discount does what to YTM

Answer 22

increases

Question 23

Does current yield consider premium or discount?

Answer 23

No

Question 24

When should you buy bonds? When interest rates are going to do what

Answer 24

go down

Question 25

What should you do to your bond maturities if you expect rates to increase?

Answer 25

shorten maturities

Question 26

When doing yield to call you do the same as YTM but adjust what

Answer 26

-use call date instead of maturity date
-principal + call penalty for principal repayment

Question 27

A call on a callable bond would most likely occur when rates have done what

Answer 27

call would occur after rates have declined

Question 28

Tax Equivalent Yield refers to what bonds

Answer 28

must convert the municipal yield to Taxable Equivalent Yield

Question 29

Compare 10% taxable bond to 7.5% tax exempt bond for someone in the 28% tax marginal bracket

Answer 29

.75 / (1-.28) = 10.42% TEY is better than 10%

Question 30

A rational investor wants to achieve what type of return regarding risk?

Answer 30

The maximum return for the units of risk taken

Question 31

Sharpe Ratio is what type of risk adjusted return return

Answer 31

total risk adjusted return

Question 32

Treynor is what type of risk adjusted return

Answer 32

Systematic risk adjusted return

Question 33

Capitalized earnings are the cap on the rate

Answer 33

earnings
————
required rate