Week 2D
Week 2D
Week 2D
Time-weighted returns
(1 + rG )
n
= (1 + r1 )(1 + r2 )...(1 + rn )
Dollar-weighted returns
• Internal rate of return considering the cash
flow from or to investment
• Returns are weighted by the amount invested
in each period:
C1 C2 Cn
PV = + + ...
(1 + r ) (1 + r )
1 2
(1 + r )n
$2 $4+$108
-$50 -$53
− 51 112
− 50 = +
(1 + r ) (1 + r ) 2
1
r = 7.117%
24-6 INVESTMENTS | BODIE, KANE, MARCUS
Time-Weighted Return
53 − 50 + 2
r1 = = 10%
50
54 − 53 + 2
r2 = = 5.66%
53
rG = [ (1.1) (1.0566) ]1/2 – 1 = 7.81%
• Examples include:
– IRA, 401(k), 529
1) Sharpe Index
(rP − rf )
σP
rp = Average return on the portfolio
rf = Average risk free rate
2) Treynor Measure
(rP − rf )
βP
rp = Average return on the portfolio
rf = Average risk free rate
ßp = Weighted average beta for portfolio
2
M= rP* − rM
24-16 INVESTMENTS | BODIE, KANE, MARCUS
2
M Measure: Example
Is Q better than P?
2
2 2 αH
S= S +
P M
α (eH )
∑ (w
i =1
pi pi r − wBi rBi )