Financial Terms related to Return

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RETURN
Abnormal returns

• Part of the return that is not due to systematic influences (market wide influences).
In other words, abnormal returns are above those predicted by the market
movement alone. Related: excess returns.

After tax real rate of return

• Money after-tax rate of return minus the inflation rate.

• Money after-tax rate of return minus the inflation rate. Hence, this refers to the
purchasing power increase.

Annualized holding period return

• The annual rate of return that when compounded t times, would have given the
same t-period holding return as actually occurred from period 1 to period t.

Arithmetic average mean rate of return

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• Arithmetic mean return.

Arithmetic mean return

• An average of the sub period returns, calculated by summing the sub period
returns and dividing by he number of sub periods.

Average accounting return

• The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

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Average rate of return

• Abbreviated ARR. The ratio of the average cash inflow to the amount invested.

Cumulative abnormal return

• Abbreviated CAR. Sum of the differences between the expected return on a stock
and the actual return that comes from the release of news to the market.

Dollar return

• The return realized on a portfolio for any evaluation period, including (1) the
change in market value of the portfolio and (2) any distributions made from the
portfolio during that period.

Dollar weighted rate of return

• Also called the internal rate of return, the interest rate that will make the present
value of the cash flows from all the subperiods in the evaluation period plus the
terminal market value of the portfolio equal to the initial market value of the portfolio.

Ex post return

• Related: Holding period return

Exante return

• The expected return of a portfolio based on the expected returns of its component
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assets and their weights.

Excess return on the market portfolio

• The difference between the return on the market portfolio and the risk less rate.

Excess returns

• Also called abnormal returns, returns in excess of those required by some asset
pricing model.

• Returns in excess of the risk-free rate or in excess of a market measure such as

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the S&P 500 index.

Expected excess return

• Is equal to the nonmarket or alpha return plus the beta-adjusted market or

systematic return. Since beta relates an asset's return to the market, then the alpha
distinguishes it from the market. Algebraically, this is presented by the expression for
a straight line or excess return equals a (alpha) + b (beta)X (market return).

Expected future return

• The return that is expected to be earned on an asset in the future. Also called the
expected return.

Expected return

• The return expected on a risky asset based on a probability distribution for the
possible rates of return. Expected return equals some risk free rate (generally the
prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference
between the historic market return, based upon a well diversified index such as the
S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

• Expected Return shows what the lender expects to earn after adjusting for the
probability of missed payments, late payments, outright defaults, etc.

• The average of a probability distribution of possible returns.

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• The return that is expected to be earned each period on a given asset over an
infinite time horizon.

Expected return beta relationship

• Implication of the CAPM that security risk premiums will be proportional to beta.

Expected return on investment

• The return one can expect to earn on an investment. See: capital asset pricing
model.

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Expected value of a return

• The most likely return on a given asset.

Geometric mean return

• Also called the time weighted rate of return, a measure of the compounded rate of
growth of the initial portfolio market value during the evaluation period, assuming
that all cash distributions are reinvested in the portfolio. It is computed by taking the
geometric average of the portfolio sub period returns.

Holding period return

• The rate of return over a given period.

Holding period return/yield

• Income plus price appreciation during a specified time period divided by the cost of
the investment.

Horizon return

• Total return over a given horizon.

Implied return

• The sum of implied internal growth plus the projected average Dividend Yield.

Incremental internal rate of return

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• IRR on the incremental investment from choosing a large project instead of a

smaller project.

Internal rate of return

• Abbreviated IRR. The discount rate that equates the present value of cash inflows
with the initial cost of a capital budgeting project; the discount rate that makes the
NPV of the project equal to $0.

• Dollar-weighted rate of return. Discount rate at which net present value (NPV)
investment is zero. The rate at which a bond's future cash flows, discounted back to

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today, equals its price.

Internal rate of return approach

• An approach to capital rationing that involves the graphic plotting of project IRRs in
descending order against the total dollar investment to determine the group of
acceptable projects.

Internal rate of return irr

• This shows the profitability of a project or a bond. It is computed by setting IRR

equal to the discount rate that makes the net present value of the cash flows equal
to zero.

Leveraged required return

• The required return on an investment when the investment is financed partially by

debt.

Market return

• The expected return on the market portfolio of all traded securities. Since it is an
expected return, it is always greater than the risk-free rate of return because market
participants are assumed to be risk-averse wealth maximizers.

• The return on the market portfolio.

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Market risk return function

• A graph of the discount rates associated with each level of project risk.

Money rate of return

• Annual money return as a percentage of asset value.

• Annual return as a percentage of asset value.

Multiple rates of return

• More than one rate of return from the same project that make the net present value

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of the project equal to zero. This situation arises when the IRR method is used for a
project in which negative cash flows follow positive cash flows. For each sign
change in the cash flows, there is a rate of return.

Portfolio internal rate of return

• The rate of return computed by first determining the cash flows for all the bonds in
the portfolio and then finding the interest rate that will make the present value of the
cash flows equal to the market value of the portfolio.

Potential total return

• Suggests the potential compounded return on your investment over 5 years, based
on expected growth of EPS. It supposes that you bought the stock at the current
price, earned the average dividend yield, and sold at the forecast high price to
achieve the potential annual price appreciation.

Promised return

• Promised Return is what the borrower agrees to pay at the time loan is taken. For
instance, if the loan amount is $1,000 and the agreed return is 10%, the borrower is
promising to pay $100 in interest payments for the first year.

Rate of return

• The yield obtainable on a security based on its purchase price or its current market
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price. This may be the amortized yield to maturity on a bond the current income
return.

Rate of return ratios

• Ratios that are designed to measure the profitability of the firm in relation to various
measures of the funds invested in the firm.

Real rate of return

• The annual percentage return realized on an investment, adjusted for changes in

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the price level due to inflation or deflation.

Real return bonds

• Abbreviated RRB. Bonds that adjust the semi-annual coupon payments and the
par value for inflation.

Realized return

• The return that is actually earned over a given time period.

Required return

• The minimum return required by investors given the risk of an investment and the
risk-free rate and the market-determined premium for risk. The required return is that
rate of return predicted by the CAPM (capital asset pricing model) formula.

• The minimum expected return you would require to be willing to purchase the
asset, that is, to make the investment.

Return

• The total gain or loss experienced on an investment over a given period of time;
calculated by dividing the asset's change in value plus any cash distributions during
the period by its beginning-of-period investment value.

• The percentage gain or loss for a security in a particular period, consisting of

income plus capital gains relative to investment. The Real Rate of Return is the
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annual return realized on that investment, adjusted for changes in the price due to
inflation.

• The change in the value of a portfolio over an evaluation period, including any
distributions made from the portfolio during that period.

Return on assets

• Abbreviated ROA. Calculated by dividing a company's annual earnings by its total

assets, displayed as a percentage. Useful to indicate how profitable a company is
relative to its total assets.

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• Abbreviated ROA. Indicator of profitability. Determined by dividing net income for
the past 12 months by total average assets. Result is shown as a percentage. ROA
can be decomposed into return on sales (net income/sales) multiplied by asset
utilization (sales/assets).

Return on equity

• Abbreviated ROE. Measures the return earned on the owners' (both preferred and
common shareholders') investment in the firm.

• Abbreviated ROE. Also known as Earned on Equity. ROE tells how effectively
company management is using the shareholders' money to make a profit. This is
useful for comparisons among companies.
A simple formula is Net Income divided by Shareholders' Equity. Generally, the
higher the ROE, the more efficient the management and the better the return to
shareholders.
It is expected that there will be some variation in the ROE numbers over time. For
example, issuing more shares increases shareholders' equity. This causes the return
on equity to decline until management can invest the new funds and generate new
earnings.
Another decline in the ROE trend can occur when a company relies heavily on debt.
If interest expenses rise significantly, net income will likely be reduced. Therefore
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ROE will be less. Return on equity is a balancing act between careful use of debt
and good use of assets.

• Abbreviated ROE. Indicator of profitability. Determined by dividing net income for

the past 12 months by common stockholder equity (adjusted for stock splits). Result
is shown as a percentage. Investors use ROE as a measure of how a company is
using its money. ROE may be decomposed into return on assets (ROA) multiplied
by financial leverage (total assets/total equity).

Return on investment

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• Abbreviated ROI. The profit or loss resulting from a security transaction, often
expressed as an annual percentage rate.

• Abbreviated ROI. Generally, book income as a proportion of net book value.

Return on total assets

• Abbreviated ROA. Measures the overall effectiveness of management in

generating profits with its available assets; also called return on investment (ROI).

• The ratio of earnings available to common stockholders to total assets.

Return to maturity expectations

• A variant of pure expectations theory which suggests that the return that an
investor will realize by rolling over short-term bonds to some investment horizon will
be the same as holding a zero-coupon bond with a maturity that is the same as that
investment horizon.

Risk adjusted return

• Return earned on an asset normalized for the amount of risk associated with that
asset.

Risk return tradeoff

• The expectation that for accepting greater risk, investors must be compensated
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with greater returns.

Risk/return trade off

• The balance an investor must decide on between the desire for low risk and high
returns; low levels of uncertainty (low risk) are associated with low potential returns,
and high levels of uncertainty (high risk) are associated with high potential returns.

Safety net return

• The minimum available return that will trigger an immunization strategy in a

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contingent immunization strategy.

Subperiod return

• The return of a portfolio over a shorter period of time than the evaluation period.

T period holding period return

• The percentage return over the T-year period an investment lasts.

Time weighted rate of return

• Related: Geometric mean return.

Total dollar return

• The dollar return on a non dollar investment, which includes the sum of any
dividend/interest income, capital gains or losses, and currency gains or losses on
the investment. See also: total return

Total rate of return

• A measure of a portfolio's performance over time. It is the internal rate of return

that equates the beginning value of the portfolio with the ending value, and includes
interest earnings and realized and unrealized gains and losses on the portfolio.

• The compounded annual return on an investment, including price appreciation and

dividends or interest.
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• In performance measurement, the actual rate of return realized over some

evaluation period. In fixed income analysis, the potential return that considers all
three sources of return (coupon interest, interest on interest, and any capital
gain/loss) over some investment horizon.

• Refers to the change in asset value plus income. For a stock it would refer to the
change in the adjusted stock price plus and dividends and other distributions, if any.
For a bond it would reflect the change in bond price plus any interest received or
accrued. It more completely measures the overall perform of an investment.

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Unleveraged required return

• The required return on an investment when the investment is financed entirely by

equity (i.e. no debt).