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KIC000017

# KIC000017 - ,L.~ Annualization Dollar Weighted Returns...

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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 two-period 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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KIC000017 - ,L.~ Annualization Dollar Weighted Returns...

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