Risk and Return •Information based on Chapter 10, 11, 12, and 13 1
Statistics Review: Rate of Returns • Measuring Investment Returns over Multiple Periods • Arithmetic average - Sum of returns in each period divided by number of periods • Geometric average - Single per-period return; gives same cumulative performance as sequence of actual returns - Compound period-by-period returns; find per-period rate that compounds to same final value • Dollar-weighted average return - Internal rate of return on investment • APR, EAR and Period Rate - Annualized Rate of Return 2
Rate of Returns 3Example: XYZ stock price and dividend history are as follows: An investor buys three shares of XYZ at the beginning of 2010, buys another two shares at the beginning of 2011, sells one share at the beginning of 2012, and sells all four remaining shares at the beginning of 2013. 1.What are the arithmetic and geometric average time-weighted rates of return for the investor? 2.What is the dollar-weighted rate of return?