# Topic 27: Investment Returns - PowerPoint PPT Presentation

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## Topic 27: Investment Returns

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### Topic 27: Investment Returns Arithmetic average: sum/n Geometric mean: Less than arithmetic as it factors in compounding As standard deviation increases, geometric ... – PowerPoint PPT presentation

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Title: Topic 27: Investment Returns

1
Topic 27 Investment Returns
• Arithmetic average sum/n
• Geometric mean
• Less than arithmetic as it factors in compounding
• As standard deviation increases, geometric
becomes larger than arithmetic
• If no standard deviation, they are same
• Steps
• Multiply all returns /-1, calculate PV of result
• Time weighted evaluate portfolio manager
• Ignores cash flows in/out of portfolio by
investors
• Includes capital gains, and dividends received by
portfolio
• Same calculation as geometric mean

2
Topic 27 Investment Returns
• Dollar weighted evaluate investors performance
• Factors cash flows in/out of portfolio
• IRR calculation
• Underperformance by mutual fund investors
• More frequent/pronounced in volatile funds
• Holding period (capital gain/loss)dividend or
interest/original investment
• Can also factor in taxes and transaction costs

3
Topic 27 Investment Returns
• Real return Nominal return Inflation rate
• Nominal 13 Inflation 3
• I ((1Nominal)/(1Inflation))-1
• Also referred to as serial
• Assumes nominal rate not compouded
• If it is, real return nominal inflation
• Internal Rate of Return, NPV
• Present value of -0-
• If IRRgtrequired return, present value positive
• Assumes cash flows reinvested at IRR
• Favors projects generating cash flows early

4
Topic 27 Investment Returns
• Total return(capital gain dividend)/investment
• YTM return on bonds
• Compute using semi-annual periods for zero coupon
bonds
• Yield to call assumes bond is called in YTM
calculation
• Current yield annual income/current price
• After-tax dividends currently taxed at 15
• Taxable equivalent yield (munis)
• tax-free yield/(1- tax rate)
• After-tax rate of return
• Taxable return x (1 tax rate)