Simple and Continuously Compounded Returns

Time Value of Money

• Future Value
• Present Value
• Compound Annual Return
• Investment Horizon
• Continuous Compounding

Effective Annual Rate

• Effective Annual Rate
• Effective Continuous Compounding Annual Rate

Asset Return Calculations

• Simple Returns
• Multi-period Returns
• Simple k-month Return

Portfolio returns

• A portfolio of investment assets
• Define a portfolio by how much wealth (weight) is invested in each asset
• Rate of return on a portfolio
• A weighted average of the simple returns of individual assets
• Sum of weights add up to 1

Adjusting for Dividends

• Total Return = Capital Gain Return + Dividend yield (gross)

Adjusting for Inflation

• Deflate the nominal price by an index of the general price level 
• Compute returns in the usual way using the deflated prices
• Real Rate of Return =

Tips

Develop an intuition of the reasonable orders of magnitudes of  rates of return on different investments.
e.g. what is reasonable for a 1-month investment for Microsoft?
What is a typical rate of return in a year
What is a typical rate of return in a month