Series 66

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Measuring Portfolio Returns - Introduction

Measuring Portfolio Returns
There are a number of ways to calculate the investment return of an account. Some of these (real return and risk-adjusted return) were discussed in the Quantitative Methods section . You will not be tested on the actual formulas, so they are not included here (other than those provided for clarity). In this section we'll focus on return measures such as the following:

  • Return on investment - This is the classic measure of performance, taking into account all cash flows (including dividends, interest, return of principal, and capital gains). To calculate, simply divide the sum of all cash flows by the number of years the investment is held, and then divide that amount by the original amount invested.
  • Holding period return - Refers to the return for the period of time the investment was actually held. This can be more meaningful than an annualized rate of return, particularly for investments held short term.

    The standard deviation of returns depends on the holding period, since stock returns are more volatile over shorter periods. As a result:

    • the shorter the holding period, the greater the variability of the return;
    • the longer the holding period, the smaller the variability of the return.
  • Annualized return- Also referred to as average return, this expresses the geometric rate of return of a portfolio over any given period into an annual basis - in other words, it provides the average annual return per year over that period.
  • Risk-free rate of return - The current rate for 90 day Treasury bills is typically used in calculations such as risk-adjusted return and the Sharpe ratio.
  • Total return - This incorporates the rate of return from all sources, including appreciation (or depreciation), dividends and interest.
Other Terms

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