PERFORMANCE

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Mentes Kapital

"Insider trading is hard to prove. To be convicted, a person must have bought or sold a stock based on material information that is both unknown to the general public and likely to have had an important effect on a company's stock price."

-Alex Berenson

FAQ regarding Equity Investments

FAQ regarding Equity Investments

We answer 9 questions in this article:
> Which is the best month in to invest in stocks
> Which is the worst month for stocks
Financial Planning for Startup Firms

Financial Planning for Startup Firms

Cash Budget: A statement of Inflow and Outflow of Cash which shows the monthly surplus or deficit.
Understanding Financial Risk

Understanding Financial Risk

This article explains the MArkowitz efficient frontier curve, Capital Market Line and the strategies investors can use to profit from this research conducted in 1952.
How to Correctly measure returns and form an expectation for the future?
 
Investors often wonder about the rosy claims made by a Mutual fund house about the returns they were able to earn. There are many ways to measure returns. Arithmetic mean returns based on Discreet compounding,Geometric mean returns based on Discreet Compounding.Arithmetic mean returns based on Continuous compounding and Geometric mean returns based on Continuous Compounding.The below table illustrates how a Fund manager can use Discreet Returns and that too arithmetic mean to show he performed better. On the Investment in WIPRO for a period of seven years he can claim 32.76% returns.                                                                                                            
An Investor must assess the performance of his investment using Continuously Compounded rate of return because it is time consistent and additive. Thus under this strict standard the Geometric Returns are only 11.45%. While assessing historical performance of an investment use continuously compounded Geometric mean.     This is the toughest measure. You must also consider the risk adjusted performance measure but that is a subject of discussion we will address another time.
 
  
 WIPRO Po P1 (P1-P0)/Po ln(P1/P0)
Year  Open Closing Discreet 100.00  Continuous Compounding 100
2007 240 180 -25.0% 75.00 -28.77% 71.23
2008 180 400 122.2% 166.67 79.85% 128.11
2009 402 670 66.7%  277.78 51.08% 193.55
2010 665 800 20.3% 334.17 18.48% 229.33
2011 801 500 -37.6% 208.59 -47.13% 121.26
2012 500 810 62.0% 337.92 48.24% 179.75 
2013 812 980 20.7% 407.84 8.81% 213.56 
             
Arithmetic Mean 32.76% AM 20.08%
Geometric Mean 22.24% GM 11.45%

Rs 100 grew to Rs 407.84 in 7 years at a CAGR of 22.24% which means that the GM is a better indicator of historical performance whether the returns have been calculated under Discreet or Continuous Compounded method.