Beruflich Dokumente
Kultur Dokumente
Presented by
Book
Analysis of Investment and
Management of Portfolio
tenth Edition
by
Chapter 1
The Investment Setting
Questions to be answered:
Why do individuals invest ?
What is an investment ?
How do we measure the rate of return on
an investment ?
How do investors measure risk related to
alternative investments ?
Chapter 1
The Investment Setting
Why Do Individuals
Invest ?
By saving money (instead of
spending it), individuals tradeoff
present consumption for a larger
future consumption.
Definition (Jones)
$1.00 4% $1.04
Defining an Investment
A current commitment of $ for a
period of time in order to derive
future payments that will
compensate for:
the
time
the
funds
are
committed
Inflation premium +
the
expected
rate
of
inflation
Risk premium
uncertainty of future flow of
funds.
Measures of
Historical Rates of Return
Holding Period Return
1.10
$200
1.1
Measures of
Historical Rates of Return
Holding Period Yield
HPY = HPR - 1
1.10 - 1 = 0.10 = 10%
1.2
Measures of
Historical Rates of Return
Annual Holding Period Return
Annual HPR = HPR 1/n
(E/B)^(1/n)
today investment
rate / annum
after year 1
rate / annum
After 2-years
or
PV
rate=i
n=
FV
FV
250
0.1832
45.8
295.8
0.1832
54.19056
349.99056
250
0.1832
2
?
PV*(1+i)^n
349.99056
1. Arithmetic Mean
where :
AM HPY/ n
1.4
Measures of
Historical Rates of Return
1.5
2. Geometric Mean
where :
GM HPR
Investors are typically concerned with longterm performance when comparing alternative
investments.
GM is considered a superior measure of the
long-term mean rate of return because it
indicates the compound annual rate of return
based on the ending value of the investment
versus its beginning value
the arithmetic average provides a good
indication of the expected rate of return for an
investment during a future individual year,
it is biased upward if you are attempting to
measure an assets long-term performance
A Portfolio of Investments
The mean historical rate of return
for a portfolio of investments is
measured as the weighted average
of the HPYs for the individual
investments in the portfolio.
HPY =
Begin
Price
$ 10
$ 20
$ 30
Beginning Ending
Ending
Market
Mkt. Value Price Mkt. Value HPR HPY Wt.
$ 1,000,000
$ 12 $ 1,200,000 1.20 20% 0.05
$ 4,000,000
$ 21 $ 4,200,000 1.05 5% 0.20
$ 15,000,000
$ 33 $ 16,500,000 1.10 10% 0.75
$ 20,000,000
$ 21,900,000
HPR =
$ 21,900,000
$ 20,000,000
1.095
1.095
-1
0.095
9.5%
Wtd.
HPY
0.010
0.010
0.075
0.095