Investment Returns

3 Key excerpts on "Investment Returns"

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  eBook - ePub

  Stock Market Math

  Essential formulas for selecting and managing stock and risk

  • Michael C. Thomsett(Author)
  • 2017(Publication Date)
  • De Gruyter

    (Publisher)

  Chapter 1 Rates of Return on Investment: What Goes In, What Comes Out Even the most seemingly easy calculation can become quite involved.

  For example, what is your “return?” If you invest money in a stock or mutual fund, you need to be able to figure out and compare the outcome; but as the following explanation demonstrates, there are many different versions of “return” and you need to be sure that when comparing two different outcomes, you are making a like-kind study. Otherwise, you can be deceived into drawing an inaccurate conclusion. And accuracy is one of your goals in going to the trouble of drawing conclusions in the first place.

  The “return” you earn on your investments can be calculated and expressed in many different ways. This is why comparisons are difficult. If you read the promotional literature from mutual funds and other investments, the return provided in the brochure could be one of many different results.

  This is why you need to be able to make distinctions between return on investment and return on capital . Your investment return is supposed to be calculated based on the amount of cash you put into a program, fund or stock. Most investors use “return on investment” in some form to calculate and compare. The return on capital is usually different and is used by corporations to judge operations. To further complicate matters, “capital” is not the same as “capitalization” so corporate return calculations can be difficult to compare. Return on capital normally means capital stock. Capitalization is the total funding of an organization, including stock and long-term debt.

  A business model of return on capital may present problems, however. Accuracy is in question when the calculation is based on a fixed value, such as capital, versus current value of the same investment:

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  eBook - PDF

  Real Estate Appraisal

  From Value to Worth

  • Sarah Sayce, Judy Smith, Richard Cooper, Piers Venmore-Rowland(Authors)
  • 2009(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Measuring return 11 11.1 Introduction Performance measurement has become increasingly important in the property market as investors have become more sophisticated and demanding. Fund managers are expected to meet or exceed a specified benchmark on a regular basis. In order to facilitate calculations and comparisons of individual property and portfolio performance, common standards have evolved. This chapter examines a number of methods used to calculate returns grouped under two main methodologies: money-weighted returns and time-weighted returns. Returns can be defined simply as the income and capital appreciation from an investment, expressed as a percentage of capital invested. Accordingly, total returns can be segmented into income returns and capital growth. Returns provide a consistent measure to assess the investment performance across the assets of an investor. A distinction should be made between yields and returns. Generally yields are a ratio of current annual income from an investment expressed as a percentage of current value. Yields tend to be a ‘snapshot’ at a given moment in time. For instance, an initial yield on a property investment is the ratio of net annual income to gross capital value. Returns relate to income and capital gains over a specific period, such as a month or year. However, the distinction is blurred by yields such as redemption yields on bonds, which are the internal rate of return on a bond held to redemption at the current price. 11.2 Simple return Simple return is a straightforward method used to calculate a return over a period. The formula below includes start and end period and market values plus cash flow over the period. TR = EMV − BMV − CE + NI BMV Aims of the chapter • To explain the requirement to measure investment performance. • To introduce the concept of perform-ance measurement. • To discuss the nature and construc-tion of property indices.

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  eBook - ePub

  Teach Yourself About Shares

  A Self-help Guide to Successful Share Investing

  • Roger Kinsky(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  inflation‐adjusted return. It's what you're really getting in terms of purchasing power.

  For instance, suppose you're receiving an after‐tax return of 3% on an investment at a time when the inflation rate is also 3%. This means that your real return is zero and your wealth isn't growing. Indeed, the capital you've invested is just marking time. However, if your return on capital is 3% before tax and you have to pay tax on the profits, then your real return after tax is negative and, in fact, your wealth is reducing rather than increasing.

  Considering investment risks

  It's important to consider the risks involved with any investment because risk and return are fundamentally related. Share investing risks are treated in detail in chapter 13 but I'll introduce the basics now.

  Risk applies to both capital gains and income.

  Capital gains risk

  This is the risk that your investment may not increase in value and, rather, could reduce. The very worst‐case scenario is that you could lose all the money you've invested; that is, you lose all your invested capital.

  Income risk

  This is the risk that your investment may not produce the expected income. For example, with an investment property, it's the risk that the tenant may default on rental payments; with shares, it's the risk that if company profits reduce, the directors may decide to reduce (or eliminate) the dividend.

  Relationship between risk and return

  A general principle that applies to all investments is that investors relate risk and return in the following way:

  The higher the perceived risk, the greater the potential return.

  Or expressed another way:

  The lower the perceived risk, the lower the potential return.

  I use the word perceived with risk because it depends on investors' perceptions of riskiness and this may not necessarily reflect the real risk. And I use the word potential

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