1. Rates and Returns

Continuously compounded return

The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.

Cost averaging

The periodic investment of a fixed amount of money.

Default risk premium

An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.

Harmonic mean

A type of weighted mean computed as the reciprocal of the arithmetic average of the reciprocals.

Holding period return

The single-period internal rate of return for a real estate property that includes property income and the change in property value over the period.

Inflation premium

An extra return that compensates investors for expected inflation.

Interest rate

A rate of return that reflects the relationship between differently dated cash flows; a discount rate.

Internal rate of return

The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).

Leverage

A measure for identifying a potentially influential high-leverage point

Liquidity premium

The compensation for liquidity risk that increases in proportion to the investment’s illiquidity.

Maturity premium

An extra return that compensates investors for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.

Money-weighted return

The internal rate of return on a portfolio, taking account of all cash flows.

Opportunity cost

Reflects the foregone opportunity of investing in a different asset. It is typically denoted by the risk-free rate of interest, r.

Real risk-free interest rate

The single-period interest rate for a completely risk-free security if no inflation were expected.

Time-weighted rate of return

The compound rate of growth of one unit of currency invested in a portfolio during a stated measurement period; a measure of investment performance that is not sensitive to the timing and amount of withdrawals or additions to the portfolio.

Trimmed mean

A mean computed after excluding a stated small percentage of the lowest and highest observations.

Winsorised mean

A mean computed after assigning a stated percentage of the lowest values equal to one specified low value and a stated percentage of the highest values equal to one specified high value.