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
