Money-weighted and time-weighted rates of return are two methods for measuring investment performance. The money-weighted rate considers cash flows, so it depends on an individual investor's activities. The time-weighted rate ignores cash flows and measures only market performance over a period. It is preferred for evaluating managers because it is not affected by deposits or withdrawals outside their control. The document provides examples of calculating each type of return for portfolios with cash flows over multiple periods.
Material Didáctico para ser utilizado en la resolución de problemas financieros tanto en cursos de pregrado como de postgrado. Se presenta desde el sistema financiero simple hasta le evaluación financieros de alternativas de inversión
Material Didáctico para ser utilizado en la resolución de problemas financieros tanto en cursos de pregrado como de postgrado. Se presenta desde el sistema financiero simple hasta le evaluación financieros de alternativas de inversión
BlueBookAcademy.com - Value companies using Discounted Cash Flow Valuationbluebookacademy
In this slideshow on valuing companies using discounted cash flows (DCF), we'll run through the most popular valuation tool used by investment bankers, traders and investors to compute the value of a company's shares and make stock recommendations.
As a fundamental concept in finance, DCF models have wider applications in valuing bonds (fixed income) and in project appraisal.
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
BlueBookAcademy.com - Value companies using Discounted Cash Flow Valuationbluebookacademy
In this slideshow on valuing companies using discounted cash flows (DCF), we'll run through the most popular valuation tool used by investment bankers, traders and investors to compute the value of a company's shares and make stock recommendations.
As a fundamental concept in finance, DCF models have wider applications in valuing bonds (fixed income) and in project appraisal.
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
IT IS AN IMPORTANT TOPIC FOR ALL COMPETITIVE LEVEL EXAMINATIONS OR GOVT EXAMINATIONS. IT IS VERY HELPFUL FOR THOSE WHO ARE APPEARING FOR THOSE JOB EXAMINATIONS,
SOLUTION OF ALL QUESTIONS FROM TEXT BOOK AND LAST 10 YEARS .
STUDENTS CAN ALSO HAVE A CRASH COURSE FOR A SHORT SPAN OF TIME.
DEMO CLASSES ARE ALSO AVAILABLE.
LIBRARY ACCESS. STUDY MATERIALS.
NOTES , SUGGESTIONS AND MOCK TESTS.
Benchmarking for Social Media: Get Social Brevard PresentationStephanie Byrd
Social Media Benchmarking on Facebook is a valuable tool. You can measure your internal engagement against your external competition or to an amazing standard like George Takei. Why is he worried...he has 4.3 million fans? Engagement to your audience always involves roamers and zombie fans. Presented at Get Social Brevard.
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Presentación con Temas Relacionados a la Ingeniería Económica.
Valor Presente, Valor Neto, Tasa Interna de Retorno, Análisis Costo Beneficio, Inversión Social , Inversión Privada
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices.
Related to chp 13 of fundamental of financial management . The Chapter is about cashflows of corporation. It helps to calculate initial, interim and Terminal cashflows. Later IRR and NPV method is applied. Helps you to easily understand chapter numerical. Is a guide to prepare for exam in a last minute. The Chapter includes self exercise and problems
This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
http://flevy.com/browse/business-document/capital-investment-analysis-230
Capital Investment Analysis
Also called Capital Budgeting - a complex topic simplified in an easy to understand presentation which is completely self-explanatory. Explains the framework for financial analysis with examples and provides practical insights. Can be used for reference, training & self paced learning. The presentation includes examples worked in an Excel sheet.
Covers:
* The nature & characteristics of long term investments made by corporations
* The problem associated with measuring the rate of return with long term investments
* The approach to solving this problem
* The key methods used in calculating the rate of return and evaluating alternatives
* The practical aspects of the various inputs required to calculate the return on investment
* The basics of the risks associated with long term investments & how to factor ?in such risks
* The strategic considerations involved in long term investment decisions
* The processes involved in long term investment decisions & its implementation
S12-1 (Learning Objective 1- Explain the purposes of the statement of.docxmtruman1
S12-1
(Learning Objective 1: Explain the purposes of the statement of cash flows) State how the statement of cash flows helps investors and creditors perform each of the following functions:
a. Predict future cash flows
Solution
answer..
purpose od cash flow statments...The purpose of the cash flow statement or statement of cash flows is to provide information about a company\'s gross receipts and gross payments for a specified period of time.
The gross receipts and gross payments will be reported in the cash flow statement according to one of the following classifications: operating activities, investing activities, and financing activities. The net change from these three classifications should equal the change in a company\'s cash and cash equivalents during the reporting period. For instance, the cash flow statement for the calendar year 2013 will report the causes of the change in a company\'s cash and cash equivalents between its balance sheets of December 31, 2012 and December 31, 2013.
The statement of cash flow\'s primary purpose is to provide information regarding a company\'s cash receipts and cash payments. The statement complements the income statement and balance sheet. When credit decisions are made, many factors must be assessed. The income statement and balance sheet provide information about some of these factors, the cash flow statement provides information about the other factors. and through these data invester can anlysis the company position ..........
Over the life of a company, total net income and net cash inflow will equal. However, since income determination is based on accrual accounting, income and cash flow will rarely equal in an annual accounting period.
.
1 Time Value of MoneyMilestone One Time Value of Money (please fi.docxmonicafrancis71118
1 Time Value of MoneyMilestone One: Time Value of Money (please fill in YELLOW cells) Explanations:Interest Rate8% FCF (Free Cash Flows) is the net change in cash generated by the operations of a business during a reporting period, minus cash outlays for working capital, capital expenditures, and dividends during the same period. This is a strong indicator of the ability of an entity to remain in business.
Note: For Milestone One, please use the Free Cash Flows from the United Parcel Service 2017 Annual Report for the years 2015, 2016, and 2017 located on Page 2 of the Report.
FCF - YearsFCF - 2015FCF - 2016FCF - 2017Amounts*6,0826,0073,573Pv*(5,631.48)(5,150.03)(2,836.36)Total Pv*(13,617.88)*In millionsInterest Rate (given) - For purposes of this exercise, use 8% interest rate. Pv=FVN/(1+I)^NPV(I,N,0,FV)With 10% decrease in FCFInterest Rate8%FCF - YearsFCF - 2015FCF - 2016FCF - 2017Amounts*5,4745,4063,216Pv*(5,068.33)(4,635.03)(2,552.73)Total Pv*(12,256.09)*In millions
2 Stock and Bond ValuationMilestone Two: Stock Valuation and Bond Issuance (fill in the YELLOW cells) PART I: STOCK VALUATIONDividend from Financial Statements:Read the Explanations to the right of the calculation cells for specific information on the data.Explanations:Year Cash Div/share ($)Dividend YieldStockholder's Equity (in millions)Stock PriceNote:
1. The dividends declared and paid by UPS for 2015, 2016, and 2017 are found on the second page of the 2017 UPS Annual Report.
2. The dividend yield for 2015, 2016, and 2017 are found on the second page of the 2017 UPS Annual Report.
3. Stockholder's/Shareholder's equity for 2015, 2016, and 2017 are found on the second page of the UPS Annual Report. 20152.923.00%2,49197.333333333320163.122.70%429115.555555555620173.322.60%1,030127.69230769231. Stock Valuation - The new dividend yield if the company increased its dividend per share by 1.75Year Cash Div/Share ($) +1.75Dividend YieldStockholder's Equity (in millions)Stock PriceDividend Yield - annual cash dividend per share of common stock divided by the market price of a share of the common stock. (Dividend yield = Annual Dividend/Current Stock Price)
Note: Current Stock Price is not part of the Financial Statements - calculated using the formula for Dividend Yield20154.674.80%2,49197.333333333320164.874.21%429115.555555555620175.073.97%1,030127.69230769232. The dividend yield if the firm doubled it's outstanding sharesYear Cash Div/Share ($) Dividend YieldStockholder's Equity (in millions) -doubledStock PriceStockholder's Equity = Assets - Liabilities. This represents the ownership of a corporations. Owners are called stockholder because they hold stocks or share of the company. The main goal of every corporate manager is to generate shareholder value. .
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Synthetic Fiber Construction in lab .pptxPavel ( NSTU)
Synthetic fiber production is a fascinating and complex field that blends chemistry, engineering, and environmental science. By understanding these aspects, students can gain a comprehensive view of synthetic fiber production, its impact on society and the environment, and the potential for future innovations. Synthetic fibers play a crucial role in modern society, impacting various aspects of daily life, industry, and the environment. ynthetic fibers are integral to modern life, offering a range of benefits from cost-effectiveness and versatility to innovative applications and performance characteristics. While they pose environmental challenges, ongoing research and development aim to create more sustainable and eco-friendly alternatives. Understanding the importance of synthetic fibers helps in appreciating their role in the economy, industry, and daily life, while also emphasizing the need for sustainable practices and innovation.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
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How to Make a Field invisible in Odoo 17Celine George
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The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
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In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
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2. Money Vs. Time-Weighted Return
Money-weighted and time-weighted rates of return are two methods of measuring per-
formance, or the rate of return on an investment portfolio. Each of these two approaches
has particular instances where it is the preferred method. Given the priority in today's en-
vironment on performance returns (particularly when comparing and evaluating money
managers), the CFA exam will be certain to test whether a candidate understands each
methodology.
Money-Weighted Rate of Return
A money-weighted rate of return is identical in concept to an internal rate of return: it is
the discount rate on which the NPV = 0 or the present value of inflows = present value of
outflows. Recall that for the IRR method, we start by identifying all cash inflows and out-
flows. When applied to an investment portfolio:
Outflows
1. The cost of any investment purchased
2. Reinvested dividends or interest
3. Withdrawals
Inflows
1.The proceeds from any investment sold
2.Dividends or interest received
3.Contributions
Example:
Each inflow or outflow must be discounted back to the present using a rate (r) that will
make PV (inflows) = PV (outflows). For example, take a case where we buy one share of
a stock for $50 that pays an annual $2 dividend, and sell it after two years for $65. Our
money-weighted rate of return will be a rate that satisfies the following equation:
PV Outflows = PV Inflows = $2/(1 + r) + $2/(1 + r)2
+ $65/(1 + r)2
= $50
Solving for r using a spreadsheet or financial calculator, we have a money-weighted rate
of return = 17.78%.
Exam Tips and Tricks
Note that the exam will test knowledge of the concept of money-
weighted return, but any computations should not require use of a fi-
nancial calculator
It's important to understand the main limitation of the money-weighted return as a tool
for evaluating managers. As defined earlier, the money-weighted rate of return factors all
cash flows, including contributions and withdrawals. Assuming a money-weighted return
is calculated over many periods, the formula will tend to place a greater weight on the
3. performance in periods when the account size is highest (hence the label money-
weighted).
In practice, if a manager's best years occur when an account is small, and then (after the
client deposits more funds) market conditions become more unfavorable, the money-
weighted measure doesn't treat the manager fairly. Here it is put another way: say the ac-
count has annual withdrawals to provide a retiree with income, and the manager does rel-
atively poorly in the early years (when the account is larger), but improves in later peri-
ods after distributions have reduced the account's size. Should the manager be penalized
for something beyond his or her control? Deposits and withdrawals are usually outside of
a manager's control; thus, a better performance measurement tool is needed to judge a
manager more fairly and allow for comparisons with peers - a measurement tool that will
isolate the investment actions, and not penalize for deposit/withdrawal activity.
Time-Weighted Rate of Return
The time-weighted rate of return is the preferred industry standard as it is not sensitive to
contributions or withdrawals. It is defined as the compounded growth rate of $1 over the
period being measured. The time-weighted formula is essentially a geometric mean of a
number of holding-period returns that are linked together or compounded over time (thus,
time-weighted). The holding-period return, or HPR, (rate of return for one period) is
computed using this formula:
Formula 2.8
HPR = ((MV1 - MV0 + D1 - CF1)/MV0)
Where: MV0 = beginning market value, MV1 = end-
ing market value,
D1 = dividend/interest inflows, CF1 = cash flow re-
ceived at period end (deposits subtracted, withdraw-
als added back)
For time-weighted performance measurement, the total period to be measured is broken
into many sub-periods, with a sub-period ending (and portfolio priced) on any day with
significant contribution or withdrawal activity, or at the end of the month or quarter. Sub-
periods can cover any length of time chosen by the manager and need not be uniform. A
holding-period return is computed using the above formula for all sub-periods. Linking
(or compounding) HPRs is done by
(a) adding 1 to each sub-period HPR, then
(b) multiplying all 1 + HPR terms together, then
(c) subtracting 1 from the product:
Compounded time-weighted rate of return, for N holding periods
4. = [(1 + HPR1)*(1 + HPR2)*(1 + HPR3) ... *(1 + HPRN)] - 1.
The annualized rate of return takes the compounded time-weighted rate and standardizes
it by computing a geometric average of the linked holding-period returns.
Formula 2.9
Annualized rate of return = (1 + compounded
rate)1/Y
- 1
Where: Y = total time in years
Example: Time-Weighted Portfolio Return
Consider the following example: A portfolio was priced at the following values for the
quarter-end dates indicated:
Date Market Value
Dec. 31, 2003 $200,000
March 31, 2004 $196,500
June 30, 2004 $200,000
Sept. 30, 2004 $243,000
Dec. 31, 2004 $250,000
On Dec. 31, 2004, the annual fee of $2,000 was deducted from the account. On July 30,
2004, the annual contribution of $20,000 was received, which boosted the account value
to $222,000 on July 30. How would we calculate a time-weighted rate of return for 2004?
Answer:
For this example, the year is broken into four holding-period returns to be calculated for
each quarter. Also, since a significant contribution of $20,000 was received intra-period,
we will need to calculate two holding-period returns for the third quarter, June 30, 2004,
to July 30, 2004, and July 30, 2004, to Sept 30, 2004. In total, there are five HPRs that
must be computed using the formula HPR = (MV1 - MV0 + D1 - CF1)/MV0. Note that
since D1, or dividend payments, are already factored into the ending-period value, this
term will not be needed for the computation. On a test problem, if dividends or interest is
shown separately, simply add it to ending-period
value. The ccalculations are done below (dollar amounts in thousands):
Period 1 (Dec 31, 2003, to Mar 31, 2004):
HPR = (($196.5 - $200)/$200) = (-3.5)/200 = -1.75%.
5. Period 2 (Mar 31, 2004, to June 30, 2004):
HPR = (($200 - $196.5)/$196.5) = 3.5/196.5 = +1.78%.
Period 3 (June 30, 2004, to July 30, 2004):
HPR = (($222 - $20) - $200)/$200) = 2/200 = +1.00%.
Period 4 (July 30, 2004, to Sept 30, 2004):
HPR = ($243 - $222)/$222 = 21/222 = +9.46%.
Period 5 (Sept 30, 2004, to Dec 31, 2004):
HPR = (($250 - $2) - $243)/$243 = 5/243 = +2.06%
Now we link the five periods together, by adding 1 to each HPR, multiplying all terms,
and subtracting 1 from the product, to find the compounded time- weighted rate of return:
2004 return = ((1 + (-.0175))*(1 + 0.0178)*(1 + 0.01)*(1 + 0.0946)*(1 + 0.0206)) - 1 =
((0.9825)*(1.0178)*(1.01)*(1.0946)*(1.0206)) - 1 = (1.128288) - 1 = 0.128288, or
12.83% (rounding to the nearest 1/100 of a percent).
Annualizing: Because our compounded calculation was for one year, the annualized fig-
ure is the same +12.83%. If the same portfolio had a 2003 return of 20%, the two-year
compounded number would be ((1 + 0.20)*(1 + 0.1283)) - 1, or 35.40%. Annualize by
adding 1, and then taking to the 1/Y power, and then subtracting 1: (1 + 0.3540)1/2
- 1 =
16.36%.
Note: The annualized number is the same as a geometric average, a concept covered in
the statistics section.
Example: Money Weighted Returns
Calculating money-weighted returns will usually require use of a financial calculator if
there are cash flows more than one period in the future. Earlier we presented a case where
a money-weighted return for two periods was equal to the IRR, where NPV = 0.
Answer:
For money-weighted returns covering a single period, we know PV (inflows) - PV (out-
flows) = 0. If we pay $100 for a stock today, and sell it in one year later for $105, and
collect a $2 dividend, we have a money-weighted return or IRR = ($105)/(1 + r) + ($2)/(1
+ r) - $100 = $0. r = ($105 + $2)/$100 - 1, or 7%.
Money-weighted return = time-weighted return for a single period where the cash flow is
6. received at the end. If the period is any time frame other than one year, take (1 + the re-
sult), multiply by 1/Y and subtract 1 to find the annualized return.
Assumptions of Time-weighted returns
Time-weighted returns assume that all cash distributions (i.e. dividends, interest, etc) are
reinvested back into the portfolio. It also eliminates the effect of cash flows in and out of
the portfolio, in essence treating the portfolio as if there were a single investment at the
beginning of the measurement period.
How are Time-weighted returns calculated?
A quick example would help illustrate the point. Assume your portfolio's value was
$1,000 at the beginning of the month, and $1900 at the end of the month. On the 10th day
of the month, you deposit $250, and on the 20th day of the month you deposit another
$250. The overall value of your portfolio (after the deposits are made) on the 10th day is
$1,300, and $1,700 on the 20th day. Therefore, there are three "sub-periods"- the first in-
cludes days 1-10, the second days 11-20, and finally the third is for days 21-30.
In order to calculate the time weighted return, we first need to calculate the return of each
subperiod.
The return of subperiod one is: [ ($1,300-$250)-$1,000 ] / $1,000 = 5%.
The return of subperiod two is: [ ($1,700-$250)-$1,300 ] / $1,300 = 11.5%
The return of subperiod three is: [ ($1,900-$1,700) ] / $1,700 = 11.8%
Finally, we compound the returns together to calculate the overall time-weighted rate of
return:
Time-weighted rate of return: [(1+0.05)*(1+0.115)*(1+0.118)]^0.33 -1 = 9.39%
r
7. Example: Time-weighted rate of return for Investor 1
Investor 2 initially invested $250,000 on December 31, 2013 in the exact same portfolio
as Investor 1. On September 15, 2014, their portfolio was worth $290,621. They then
withdrew $25,000 from the portfolio, bringing the portfolio value down to $265,621. By
the end of 2014, the portfolio had decreased to $250,860.
Using the same process, Investor 2 ends up with the exact same time-weighted rate of
return for the year.
Example: Time-weighted rate of return for Investor 2
8. INTERNAL RATE OF RETURN
IRR is essentially a money-weighted return since cash contributions to the portfolio de-
termine the return of the portfolio. Total return, on the other hand, is a time-weighted re-
turn, in that the timing of cash contributions to the portfolio is irrelevant since the portfo-
lio is re-evaluated whenever there are cash inflows or outflows. It is time-weighted be-
cause only the time period over which the return is calculated matters. Think of time-
weighted return as the return on the prices of the securities in the portfolio and money-
weighted return as the return you receive on your money, based on when you invested it
during the time period.
IRR
Realized return (internal rate of return) is calculated consistently for both monthly and
daily data.
Suppose:
= the initial market value of a portfolio
= the ending market value of a portfolio
= a series of interim cash flows
then the Internal Rate of Return is the rate that equates the sum of net present value of all
cash flows to zero:
where are times when there are interim cash contributions
9. and are entered with a negative sign because they represent cash
outflows for the portfolio.
With an iterative algorithm, we find the that solves the equation and present it as the
realized return/IRR for the portfolio.
Total Return
Total Return is calculated differently for monthly and daily data
For monthly data, total return is calculated by geometrically linking the IRR for each in-
terim month. The approximation is used to avoid portfolio re-evaluation whenever there
are cash inflow or outflows. Generally speaking, the shorter the sub-sample period, the
more accurate the approximation is.
For daily data, we keep track of the portfolio value for each trading day. Obviously, the
portfolio is always re-evaluated when there are cash inflow or outflows. That’s why the
total return calculation for daily data is very accurate.
The difference between IRR and Total Return
These two returns are meant to be different. IRR is a money-weighted return, in that the
interim cash contributions to a portfolio will change the IRR or the portfolio. Because of
this, it is account-specific. On the other hand, total return is time-weighted return: the
timing of cash contributions is irrelevant and total return captures solely the market per-
formance during a specific time period, thus is market-specific.
An example will help to illustrate this. Suppose the investment horizon is three years and
the portfolio is composed of one security. Suppose the price of the security sits flat
($100) for the first two years, and doubles (to $200) on the third year. There are $100
cash contributions at the end of both the first and second years. The total return for the
three-year time period is 100% despite the interim cash contributions. The annualized
return for the portfolio is 26%.
On the other hand, the interim cash contribution matters for IRR calculation. Let’s con-
sider two scenarios, in one, the investor puts in an additional $100 at the end of the first
year, and in the second scenario, the investor puts in the additional $100 at the end of the
second year.
Suppose:
10. = IRR for the first scenario
= IRR for the second scenario
then the following equations must hold in calculating IRR:
For the first scenario:
For the second scenario:
In the second scenario, since the additional contribution spends less time idle earning no
return, the overall portfolio return is higher than the return for the first portfolio. This
example illustrates that cash contributions with different timing cause different IRR for
the portfolio even though the underlying securities earn the same total return during that
specified time period.
11. Regardless of the amounts both investors contributed or withdrew from the portfolio,
they ended up with the exact same return. This is precisely the result that should be ex-
pected. The time-weighted rate of return is not affected by contributions and withdrawals
into and out of the portfolio, making it the ideal choice for benchmarking portfolio man-
agers or strategies. If we compare their return to the returns of the MSCI Canada IMI
Index over the same period (which their portfolio manager was attempting to track), we
also get the same result of 9.79%.