Unit 4 - Session 19 Flashcards
Current Yield on Investment
Annual income stream (interest and dividends) divided by the current market price. Debt securities annual is always fixed as a percentage of par and does’t fluctuate when the market price of the security changes.
Example: A bond with a 5% coupon always pays $50/yr. If the market price on a bond is 80 ($800), the current yield is 6.25% (50 divided by 800).
Stock yields are given in dividends and usually appear on a quarterly basis. To find the annual yield, multiply by the dividend by 4 to arrive at the annual dividend.
Total Return
Includes the income from dividends and interest plus any capital appreciation (or less capital appreciation) over a given time period, usually one year.
For Bonds the Total Return is YTM (which is the bond’s IRR)
Holding Period
The length of time an investor holds an investment
Hold Period Return
The return received during the hold period. Total return income plus capital appreciation (can be calculated at anytime where is total return is usually calculated annually).
Annualized Return
Return an investor would received had he held an investment for one year. Actual return by annualization factor (the number of months in the year divided by the number of months an investment is held).
Real Rate of Return
returns that have been adjusted for inflation. Reduce the nominal return by the inflation rate, as reflected in the CPI.
Example: If a bond has a 8% coupon and the CPI is 3% the inflation-adjusted return is 5%.
If an equity has a total return of 25% and the CPI was 6% the real rate of return would be 19%.
Calculate inflation-adjusted and after tax return =
(1 + the return) / (1 + the inflation rate) - 1.
shorthand way to approximate the real rate of return is to reduce the return amount of inflation during the period
After-Tax return
aka adjusted return reduces the investment’s return by the client’s tax rate. If an investor receives a 10% return and is in the 25% tax bracket the tax bracket is calculated by multiplying the return by (1 - .25) or .75 for a 75% of the 10% return for 7.5% after-tax return.
Probably Returns
Estimates of the likely returns and investment may yield. Expected or Probably return = (probability of return #1 x possible return #1) + (probability of return #2 x possible return #2)
Sharpe Ratio
Measures the risk-adjusted return. Measures the amount of return per unit of risk taken. the higher the ratio, the better or more return per unit of risk taken. Subtracts the risk-free rate from the overall return of the portfolio divided by the standard deviation of the portfolio.
Risk Premium
Premium demanded for internal and external risk factors. Internal risks included: business risk, credit risk, liquidity risk, currency risk, and country risk. External risk factors include: market risk, interest risk, macroeconomic in nature and non-diversifiable.
Internal Rate of Return (IRR)
Preferred method of measuring the return on a DPP; take into consideration the time value of money; is the way YTM of a bond is computed.
Time-Weighted returns
Use to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals
Dollar-Weighted Returns
used to determine the rate of return an individual investor earned on the basis of the investor’s particular cash flow into and out of a portfolio
Index Benchmarks
Large Cap - S&P 500
Mid Cap - S&P 500
Small Cap - Russell 2000
International Stocks - EAFE
Dow Jones Industrial Average (DJIA)
30 industrial stocks - 30 best known corporations in the world. Price weighted so it is an average
