FINA4320 chapter 6 - Class 6 Risk and Return I Rates of...

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Class 6 Risk and Return I
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Rates of Return: Single Period HPR P P D P = - + 1 0 1 0 HPR = Holding Period Return P 1 = Ending price P 0 = Beginning price D 1 = Dividend during period one
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Rates of Return: Single Period Example Ending Price = 24 Beginning Price = 20 Dividend = 1 HPR = ( 24 - 20 + 1 )/ ( 20) = 25%
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Rates of Return: Multiple Period Example Fund: starts with $1m under management (Initial Value = 1m) Receives additional funds during the year (quarterly) -- Cash Flow (CF) CF can be positive or negative Note (next slide): Net flow -- represents the new investments attracted by high previous returns
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Returns: Multiple periods (p.133) Quarter 1 2 3 4 Assets(Beg.) 1.0 1.2 2.0 .8 HPR .10 .25 (.20) .25 Assets (Before Net Flows) 1.1 1.5 1.6 1.0 Net Flows 0.1 0.5 (0.8) 0.0 End Assets 1.2 2.0 .8 1.0
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How to Characterize Returns? Average Returns: Arithmetic Geometric Dollar-weighted
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Returns Using Arithmetic and Geometric Averaging Arithmetic r a = (r 1 + r 2 + r 3 + . .. r n ) / n r a = (.10 + .25 - .20 + .25) / 4 = .10 or 10%
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This note was uploaded on 02/16/2009 for the course BUSINES 4320 taught by Professor Alexeiboulatov during the Spring '09 term at Houston Baptist.

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FINA4320 chapter 6 - Class 6 Risk and Return I Rates of...

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