Returns of Financial Assets and Instruments

How returns on financial assets are measured: holding period, arithmetic and geometric returns, compounding and continuous returns, the required rate of return, and excess, real, gross, net, after-tax and leveraged returns.

1. 1. Financial assets, yields and expected versus actual returnsEvery return comes from a price change and from cash paid out, and the return you plan on before investing is never guaranteed to be the one you get.Free12 min
2. 2. 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
3. 3. Required return, risk premia and excess returnsThe required return is the real risk-free rate plus inflation plus a premium for each risk the investment carries, and an excess return measures how far an actual return beat a benchmark.14 min
4. 4. 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
5. 5. 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
6. 6. 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
7. 7. 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
8. 8. Taxing price and income returnsPrice gains and cash distributions are often taxed at different rates, and only when realised, so the after-tax return depends on how the return was earned and when gains are taken.12 min
9. 9. Leverage through call optionsA call option gives exposure to a share for a small premium, so percentage gains and losses are far larger than on the share itself, and the whole premium is lost unless the price ends above the strike.11 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