chapter 5 - Bodie Kane Marcus Essentials of Investments...

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Essentials of Investments Bodie • Kane • Marcus Chapter 5 Risk and Return: Past and Prologue
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Essentials of Investments Bodie • Kane • Marcus Rates of Return: Single Period P D P P HPR 0 1 0 1 + - = HPR = Holding Period Return (Rate of return over a given investment period) = Capital Gains Yield + Dividend Yield. P 1 = Ending price, P 0 = Beginning price. D 1 = Dividend during the period (Assuming received at the end of period; HPR for Bond: Coupon or interest payment during the period).
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Essentials of Investments Bodie • Kane • Marcus Rates of Return: Single Period Example Ending Price = 24 Beginning Price = 20 Dividend = 1 HPR = ( 24 - 20 + 1 )/ ( 20 ) = 25% HPR is a simple and unambiguous measure of investment return over a single period. But, often investors will be interested in average returns over longer periods of time.
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Essentials of Investments Bodie • Kane • Marcus Rates of Return: Multiple Periods Data of a mutual fund (p. 111) Q1 Q2 Q3 Q4 Beg. Assets 1.0 1.2 2.0 0.8 HPR 0.10 0.25 (0.20) 0.25 TA (Before Net Inflows) 1.1 1.5 1.6 1.0 Net Inflows 0.1 0.5 (0.8) 0.0 End Assets 1.2 2.0 0.8 1.0 How to characterize the fund performance over the year, given that the fund experienced both cash inflows and outflows?
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Essentials of Investments Bodie • Kane • Marcus Rates of Return: Multiple Periods Arithmetic Average Sum of returns in each period divided by the number of periods. – r A = (r 1 + r 2 + r 3 + . .. + r n ) / n r A = (.10 + .25 - .20 + .25) / 4 = .10 or 10% The best forecast of performance in future quarters, using this particular sample of historic return. Ignores compounding, thus does not represent an equivalent, single quarterly rate of return for the year.
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Essentials of Investments Bodie • Kane • Marcus Rates of Return: Multiple Periods Geometric Average The single per-period return that gives the same cumulative performance as the sequence of actual returns (compounding)
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This note was uploaded on 12/13/2011 for the course MANAGEMENT 103 taught by Professor Mr.singh during the Spring '11 term at Aristotle University of Thessaloniki.

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chapter 5 - Bodie Kane Marcus Essentials of Investments...

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