MODULE 1.3: COMMON MEASURES OF RETURN

Question 1

What is an annualized return?

Answer 1

Taking the HPR and annualizing it by making it to the power of time (like 365/x)

annualized return = ((1 + HPR) ^ 365 / t ) - 1

Question 2

Annualized return formula

Answer 2

Annualized return =(1+HPR)^ (365 / x) - 1

Question 3

What is the time value of money and how does it’s compounding effect present and future cash flows
How does it effect
- interest rate
- future value of cash flow
- present value of a given cash flow

Answer 3

The value money gains over time. This would be looking at time in the point of view of present value and future value based on returns

the more frequently money compounds, the higher the effective interest rate is and the higher the future value of cash flow. Decreaases the present value of a given cash flow

Question 4

The calculation for the present value of future cash flow

Answer 4

Can do this using a calculator

FV, I/Y, n, CPT PV calculation

Question 5

Continuously Compounded return

Answer 5

return that compounds forever with increasingly shorter compounding periods. We would need to take the natural log of the HPR to get this amount. As the compounding periods get more rapid, where does the return lie?

CCR = ln(1+HPR)

Question 6

Gross return

Answer 6

Gross return is the total return after deducting commissions on trades and other costs necessary to generate the returns, but before deducting fees for the management and administration of the investment account.

Question 7

Net return

Answer 7

Net return is the return after management and administration fees have been deducted.

Question 8

Pretax nominal return

Answer 8

refers to return before paying any taxes like dividend income, interest, short term / long term capital gains.

Question 9

after tax nominal return

Answer 9

return after paying any taxes like on dividend income etc

Question 10

real return

Answer 10

is nominal return adjusted for inflation. Consider an investor who earns a nominal return of 7% over a year when inflation is 2%. The investor’s approximate real return is simply 7 − 2 = 5%. The investor’s exact real return is slightly lower: 1.07 / 1.02 − 1 = 0.049 = 4.9%.

Question 11

leveraged return

Answer 11

if someone is using leverage to purchase something, the leverage must be subtracted from the return.

Instead of paying the full price for an investment, you only pay a portion in cash and borrow the rest. This allows your gains (or losses) to be multiplied compared to your actual cash investment.

Two common examples:

1. Futures contracts: You only need to put down a small amount of cash to control a much larger investment
2. Real estate: Most people make a down payment and take out a mortgage instead of paying the full price of the property in cash

Question 12

leveraged return calculation

Answer 12

v0 = how much i invested | Vb = how much i borrowed rb = return on investment.

This basically subtracts the total investment with the borrowed rate x how much i borrowed and divides it with how much i borrowed. For a unit of how much i put in, how much is it that I’m making back?

Question 13

If an investment loses 3% of its value over 120 days, its annualized return is closest to:

Answer 13

-9%

Question 14

If a stock’s initial price is $20 and its price increases to $23, its continuously compounded rate of return is closest to:

Answer 14

13.98%.