Rates and Returns

What an interest rate is made of, and every way the curriculum measures a return: holding period, arithmetic, geometric, harmonic, trimmed and winsorized means, money- vs time-weighted, annualised, continuously compounded, and gross, net, after-tax, real and leveraged returns.

1. 1. What an interest rate is made ofAn interest rate prices the gap between money now and money later, and it is built from a real risk-free rate plus a premium for each risk the lender carries.Free13 min
2. 2. Holding period returnA holding period return measures everything you earned over one stretch of time, price change plus income, relative to what you paid.12 min
3. 3. Arithmetic and geometric mean returnsThe arithmetic mean is the typical single-period return; the geometric mean is the steady rate that would have produced the same ending wealth.13 min
4. 4. Harmonic, trimmed and winsorized meansThe harmonic mean averages ratios applied to a fixed amount and damps large values; trimmed and winsorized means limit the pull of outliers.13 min
5. 5. Money-weighted returnThe money-weighted return is the IRR of the investor's own cash flows: what the investor actually earned, given when and how much money went in and out.Free13 min
6. 6. Time-weighted vs money-weighted returnThe time-weighted return strips out client cash flows, so it measures the manager; the money-weighted return measures the investor.Video · 7 min14 min
7. 7. Integrated cases: balance tables, money-weighted and time-weighted returnsWhen a case gives you only start-of-year balances and yearly returns, roll the balance forward to find the new money each year, then use those flows for the money-weighted return and the yearly returns for the time-weighted return.16 min
8. 8. Annualised and continuously compounded returnsPut every return on a per-year basis by compounding it, and use continuously compounded (log) returns when you want returns that add up over time.Video · 6 min14 min
9. 9. Gross, net, after-tax, real and leveraged returnsPeel a headline return down to what the investor keeps after fees, taxes and inflation, and remember that leverage magnifies whatever is left, both up and down.Video · 7 min14 min
10. 10. Integrated cases: from total return to what the investor keepsA fund's headline return passes through a fixed sequence of adjustments, and the case is won by taking them in the right order and applying each to the right base.15 min