Annualization
• Variance is proportional to time,
t.
What is the annual
variance of ABIT returns?
cr~""""1
=
cr;"£k!)'
x 52
= .001264x52
=.06573
• Standard deviation is proportional to the square root of
t.
What is the annual standard deviation of ABIT returns?
= .03555x 7.2111
= .2564
or
25.64%
Dollar Weighted Returns
• Consider two portfolio managers (A and B) who have
identical investment styles and skill.
• Assume over a twoperiod investment horizon they produce
exactly the same capital gains with the funds entrusted to
them: 25% in the first period and 5% in the second period.
• Further, suppose each manager receives from his respective
investor $500,000 to invest.
• The difference is that Manager A receives all of these funds
immediately, whereas Manager B's investor commits only
$250,000 initially and the remaining $250,000 at the end of
the first period.
Dollar Weighted Returns
• The immediate effect of this discrepancy can be seen by
calculating the terminal (period 2) value of each portfolio:
Portfolio A:
SOo,000[(1.2S Xl.OS)]
=
5656,2S0
Portfolio B:
25O,OOO[(1.2SX1.0S)]+ 25O,OOO(I.0S)= 5590,62S
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 Fall '10
 Sapp
 Net Present Value, Internal rate of return, IBM Monthly Returns

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