T3

Question 1

Holding period returns (HPR)

Answer 1

The holding-period return (HPR) measures the total return from holding an asset over the holding period:

Question 2

RATES OF RETURNS

Answer 2

Returns over multiple periods:

Arithmetic average
Geometric average

Annualized rate of returns

Effective annual rate (EAR)
Annual percentage rate (APR)

Question 3

Arithmetic vs. Geometric average

Answer 3

ARITHMETIC
Solves one of main shortcomings of HPR, giving a better understanding of the investment’s performance throughout the holding period
Forecast for the future period.
However, it ignores the compounding effect
GEOMETRIC
Add the effect of compounding between each period
The most representative of the return the investor actually received from her investment

Question 4

ANNUAL PERCENTAGE RATE APR

Answer 4

Annual interest rates on savings account, CDs, mortgages, bank loans, credit cards, bonds are quoted (by law) as APR
Simple interest principal, ignoring compounding (i.e. interest charged on interest) in contrast to EAR.