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ADMS 3900 (9)
Lois King (9)


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York University
Administrative Studies
ADMS 3900
Lois King

ANALYSIS OF RETURNS • Review past performance to make future predictions A) TOTAL RETURN (from previous chapters)--Annualized Best return to use if you are trying to measure the total effect of returns over time given some stated beginning amount • Converts total return to positive • Used for cumulative wealth index and geometric mean Arithmetic Mean • Better measure of average performance over single periods (average) • Used to estimate performance for the next year D) Geometric mean • Arithmetic mean is acceptable to evaluate estimated performance of next period but can be misleading when analyzing several years • Geometric Mean: 1) shows true average compound rate of growth or the rate at which the dollar grows, taking into account the variability of the returns 2) better measure of the change in wealth over more than a single period 3) always less than arithmetic mean because it allows for the compounding effect Formula Geometric Mean = (RR *RR *…RR ) 3 1/n- 1 E) Cumulative Wealth index –Excel handout on TSX to be used to illustrate calculations • Measures the cumulative effect of total returns (income & price change) over time • Measures change in wealth over time • Uses index values (TSX/NASDAQ, NYSE) to have a specified beginning value Formula CWI = Beginning index * return relative * return relative 2* etc. • Interest Rate Risk o Changes in interest rates will affect investment value. • Market Risk o Political, economic, social events • Inflation (Purchasing Power) Risk o interest rates usually rise with inflation • Busines
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