Business

Money-weighted Rate of Return

Money-weighted return is the internal rate of return of an investment. It is the rate of return that equates the initial value of an investment with future cash flows such as dividends and sale proceeds. Over multiple periods, it inherently overweights and underweights individual period returns with high and low starting investment value.

Bond Equivalent Yield

Bond equivalent yield is the rate of return on a money market instrument that is calculated with reference to the purchase price of the instrument based on a 365-day year. It can be used to compare returns earned on the money market instrument with return earned by a bond.

Stock Valuation

Stock valuation is the process of determining the intrinsic value of a share of common stock of a company for the purpose of identifying overvalued and undervalued stocks. There are two approaches to stock valuation: (a) absolute valuation i.e. the discounted cashflow method and (b) relative valuation (also called the comparables approach).

Bond Valuation

Bond value equals the present value of the bond cash flows i.e. coupon payments and maturity value at the market discount rate, the rate of return required by investors given the risk of the bond.

Money Market Yield

Money market yield is the rate of return on highly liquid investments with a maturity of less than one year. It is calculated by multiplying the holding period return with a factor of 360/t where t is the number of days between the issue date and maturity date of the investment.

Effective Annual Yield

Effective annual yield is a measure of annual return on investment that takes the compounding of interest into account. It is calculated by compounding and annualizing the holding period return.

Bank Discount Yield

Bank discount yield (or simply discount yield) is the annualized rate of return on a purely discount-based financial instrument such as T-bill, commercial paper or a repo calculated as the difference between the face value and issue price divided by face value multiplied by 360 divided by number of days between issue date and maturity date.

Portfolio Variance

Portfolio variance measures the dispersion of average returns of a portfolio from its mean. It tells us about the total risk of the portfolio. It is calculated based on the individual variances of the portfolio assets and their mutual correlation.

Covariance

Covariance measures the extent to which two variables, say x and y, move together. A positive covariance means that the variables move in tandem and a negative value indicates that the variables have an inverse relationship. While covariance can indicate the direction of relation, the correlation coefficient is a better measure of the strength of relationship.

Correlation Coefficient

Correlation coefficient measures the degree to which two variables move together. Its value ranges between -1 and 1. -1 indicates perfectly negative relationship, 1 shows a perfectly positive relationship and zero means there is no linear relationship between the variables. Correlation doesn’t necessarily mean causation.