MMP321 Lecture Notes - Lecture 4: Financial Risk, Investment, Weighted Arithmetic Mean
31 May 2021
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Document Summary
E. g. what the past six month return of. Burwood property was: ex ante returns = forecast returns used to make investment decisions. Calculate the arithmetic mean (ar) or the return for each holding period (e. g. the average monthly return of a property): The sigma means a summation function (e. g. r_jan+r_feb+r_mar etc) This ar is an average/mean return: calculate the time weighted return (twrr) also called geometric return. Twrr captures compounding & the relationship between each return (e. g. the average annual return accounting for compounding). N. b. this assumes even rent is reinvested which is not always the case. 1: net present value (npv, takes the total return perspective necessary for successful investment. Gives a dollar value of benefit of the project: provides superior ranking than twrr when considering mutually exclusive projects. Cfj = the cash flows in each period n = number of periods r = the required rate of return or discount rate.
