©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 Chapter 9 Measuring Investment Performance: The Concept of Returns SLIDE 1.

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©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 Chapter 9 Measuring Investment Performance: The Concept of Returns SLIDE 1

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 CHAPTER OUTLINE 9.1 Investment Returns: Basic Definitions and Classification Two Fundamental Types of Return Measures Advantages and Disadvantages of Periodic and Multiperiod Return Measures 9.2 Periodic Returns Formal Definition of the Periodic Return Time-Weighted Investment NCREIF Index Return Formula Real versus Nominal Returns Measuring Risk in Returns Relationship between Risk and Return Summarizing Periodic Returns: Synthesizing the Three Ways to Break Down the Total Return 9.3 Multiperiod and Money-Weighted Returns Time-Weighted Average Return Internal Rate of Return (IRR) 9.4 Chapter Summary SLIDE 2

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 LEARNING OBJECTIVES After reading this chapter, you should understand: What is meant by investment returns and how to quantify both period-by-period total returns and IRRs. The two major components of the total return, and why they are important. The characteristic features of the main types of returns, and when it is best to use each type. What is meant by risk in investment, how to quantify risk, and how it relates to returns. How to account for inflation in return measures. The NCREIF Property Index (NPI) and how the NPI return formula is derived. SLIDE 3

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Investment Returns: Basic Definitions and Classification SLIDE 4

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Two Fundamental Types of Return Measures SLIDE 5

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Advantages and Disadvantages of Periodic and Multiperiod Return Measures SLIDE 6

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Periodic Returns SLIDE 7

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Formal Definition of the Periodic Return SLIDE 8

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Time-Weighted Investment SLIDE 9

©2014 OnCourse Learning. All Rights Reserved. CHAPTER NCREIF Index Return Formula SLIDE 10

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Real versus Nominal Returns SLIDE 11

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Measuring Risk in Returns SLIDE 12

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 EXHIBIT 9-1 Risk and Expected Return as Future Return Probability Distributions: Three Assets SLIDE 13 © OnCourse Learning

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Relationship between Risk and Return SLIDE 14

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 EXHIBIT 9-2 Financial Economics in a Nutshell: Risk and Return SLIDE 15 © OnCourse Learning

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Summarizing Periodic Returns: Synthesizing the Three Ways to Break Down the Total Return SLIDE 16

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Multiperiod and Money-Weighted Returns SLIDE 17

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Time-Weighted Average Return SLIDE 18

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Internal Rate of Return (IRR) SLIDE 19

©2014 OnCourse Learning. All Rights Reserved. CHAPTER Chapter Summary SLIDE 20

©2014 OnCourse Learning. All Rights Reserved. CHAPTER 9 KEY TERMS returns ex post ex ante period-by-period (periodic) returns multiperiod returns holding period returns (HPR) time-weighted return (TWR) internal rate of return (IRR) money-weighted return (dollar-weighted return) comovement total return income return appreciation return current yield capital return (gain, growth) inflation (general, CPI) real return nominal returns standard deviation volatility risk premium risk-free interest rate time value of money arithmetic average return geometric average return chain-linking (compounding) returns SLIDE 21