Measuring Return

Question 1

Holding Period Return Formula and important notes

Answer 1

screenshot

other formula in case
HPR = [ (1 + R1) x (1 + R2) x …. ) - 1

Question 2

Effective Annual Return Formula

Answer 2

= [ (1 + (i /n)) ^n] - 1

*if they include this w a TVM question, then you don’t have to annualize N or I.

Question 3

Arithmetic Average

Answer 3

just normal average

Question 4

Geometric Average

Answer 4

-better formula than arithemtic.
-remember formula
-this is the compounded rate of return.

Question 5

Weighted Average Share Price

Answer 5

= [ (# of shares x price per share) + (# of shares x price per share) ….. ] / [ total # of shares ]

Question 6

NPV notes and know how to use the fin calc

Answer 6

NPV greater than or equal to zero = accept

Question 7

IRR Def

Answer 7

the discount rate that sets the NPV formula equal to zero.

if NPV is positive, then IRR > Discount rate
If NPV is zero, then IRR = Discount rate
If NPV is negative, then IRR < Discount rate

Question 8

***EXAM TIP

How do you find the dollar weighted return and Time-Weighted return?

Answer 8

calculate IRR using ….

dollar weighted- using investor’s cash flows

time-weighted- using/assuming buy and hold

***Mutual funds report on a time-weighted basis.

Question 9

Explain Arbitrage Pricing Theory (APT)

Answer 9