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31 Cards in this Set
- Front
- Back
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Dollar-weighted return
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equal to IRR, Sum of the discounted cash inflows.
1. set discounted value of cash flows equal to time 0 of investment 2. |
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simple return
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return = (w1-w0)/w0
wealth at period 1, minus wealth invested to realize that profit, divided by w0 |
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W2 /(1 + r)2 + CF1 /(1 + r) = W0
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dollar-weighted return
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r = (W1 + CF - W0)/W0
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simple return with CF just before end of period
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r = [W1 - (W0 - CF)]/(W0 - CF)
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simple return with CF just after beginning of period
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equation to annualize return
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Ra = (1+ Rt)^(12/n)
where n is number of months in period |
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4 steps of time-weighted returns
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1. divide the period into sub periods based on when cash inflows and outlflows occurred
2. Determine 'simple' returns for each sub-period 3. compound sub period returns 4. annualize the compunded return |
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tells you how much a dollar invested at the beginning of the period would have grown by the end of the period
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time-weighted return
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compounding returns for time-weighted return
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Rc = [(1+R1)*(1+R2)] - 1
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Properties of Dollar-Weighted Return
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1. influenced by investor's decision of withdrawing/adding funds
2. reflects timing and security selection - only good measure of investor if they make both of these decisions 3. not appropriate for investor acting as agent for another party that has withdrawal privledges |
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Properties of Time-Weighted return
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1. Removes influence on return of when funds are added and/or withdrawn
2. Measures security selection ability of money manager |
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attribution analysis
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identifies sources of portfolio's tracking error return (also known as 'active return')
explains ter = Rp - Rb where Rp is return on portfolio and Rb is return on benchmark index |
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attribution analysis caveat
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more trades within the period across sectors --> more inaccurate analysis
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3 sources of tracking error return
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1. allocation - did manager overweight certain sectors?
2. selection - did manager select securities that had higher return than sector average? 3. interaction - did manager overweight sectors that he/she was able to earn above average returns? |
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allocation equation
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A = (Portfolio sector w - Benchmark sector w)*(Benchmark sector r - rb)
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selection equation
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S = (Portfolio sector r - Benchmark sector r)*Benchmark sector w
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interaction equation
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I = (Portfolio sector w - Benchmark sector w)*(Portfolio sector r - Benchmark sector r)
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stock index
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"An index is a statistical measure designed to show changes in a
variable or a group of related variables over time” |
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value - weighted index
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based off of aggregate market value
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value weighted index equation
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Iv(t) = [MV(t)/MV(0)]*Iv(0)
where MV(t) is market value of index at date t |
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price weighted index
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Ip(t) = [SUMP(t)/SUMP(0)]*Ip(0)
where: SUMP(t) = sum of stock prices of stocks in index on date t Ip(0) = value used to ‘standardize’ index |
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benchmark portfolio
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portfolio managed passively (invested in index)
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value stock
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a stock that is 'undervalued' so to speak. This means it has a low market value and high book value (so BV/MV is high)
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growth stock
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a stock that is overvalued. Has a low book to market ratio.
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January effect
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January always has huge returns for small firms
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momentum
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The rate of acceleration of a security's price or volume. The idea of momentum in securities is that their price is more likely to keep moving in the same direction than to change directions. In technical analysis, momentum is considered an oscillator and is used to help identify trendlines.
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size effect
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the theory that small firms, on average, outperform large firms. This generally holds true, however it is misleading. Small firms have lower stock prices, so an increase in price creates a larger return.
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nominal return
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Refers to percentage change in dollar value of a stock (or a
portfolio) over a period of time |
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Nominal return equation
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NR = (Pe – Pb )/Pb
Pb = beginning-of-period value of the stock – Pe = end-of-period dollar value of the stock |
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real stock return
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Refers to percentage change in dollar value of a stock (or a
portfolio) over a period of time, after considering inflation |
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real return equation
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RR = (1 + NR)/(1 + IR) – 1
• IR = (Ce – Cb )/Cb is the inflation rate • Ce = end-of-period value of the inflation index • Cb = beginning-of-period value of the inflation index • Note that if IR = 0, then RR = NR |
