8
Concepts
6
Formulas
2
Decisions
6
Quiz Questions
8 concepts covered in this module.
Nominal rate = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium + Maturity premium.
Total return earned from holding an asset over a single period, including price change and income.
Arithmetic mean is the simple average of returns; geometric mean accounts for compounding. Geometric ≤ Arithmetic always.
Used for averaging ratios like P/E or dollar-cost averaging. Always ≤ Geometric mean ≤ Arithmetic mean.
IRR of all cash flows; sensitive to timing and size of external cash flows. Reflects investor experience.
Geometric mean of sub-period returns; not affected by external cash flows. Reflects manager performance.
rcc = ln(1 + HPR). Allows additive compounding across time periods.
Gross = before management fees; Net = after all fees. Pre-tax vs after-tax returns also critical.
6 essential formulas for this module.
Where: P0 = beginning price, P1 = ending price, D1 = income/dividend
Where: Ri = return in period i, n = number of periods
Where: n = number of observations, Xi = individual values
Where: c = number of periods per year
Where: ln = natural logarithm
Where: π = inflation rate
2 decision frameworks to guide your analysis.
Visual overview of how concepts connect in this module.
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Interest Rate Components
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