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Capital Market

Notes

 

  • Medium to long term (1 ~ 30+ years).
  • Safe form of investment.
  • Low risk / low return.
  • Marketable.
  • Liquid

 


Instruments

 

  • Corporate Bonds.
  • Federal Agency Issues.
  • Inflation Protected Treasury Bonds (TIPS) – Real rate plus the principal adjusted up for inflation.
  • International Bonds.
      • Euro Bonds (outside country of issue).
      • Foreign Bonds (same country of issue) (i.e. BMW issue US$ bonds in US).
  • Mortgage Backed Securities.
  • Municipal Bonds.
  • US Treasury Bonds (T-Bonds) – 10+ years.
  • US Treasury Notes (T-Notes) – 1 ~ 10 years.

Holding Period Return (HPR)

 

Holding Period Return (HPR)

Holding Period Return (HPR) is a measure of the total return on an investment over a specific period of time, regardless of whether the investment is held for a short or long duration. It takes into account both income earned from the investment (such as dividends or interest) and capital gains or losses due to price changes during the holding period.

HPR is particularly useful for assessing the performance of an investment over a discrete time period, like a year, month, or any other specified time frame. It’s often used in investment analysis to compare the performance of different assets, portfolios, or investment strategies.

 


Formula for Holding Period Return (HPR)

The basic formula for calculating the Holding Period Return (HPR) is:

 

HPR=Final PriceOriginal Price+IncomeOriginal Price\text{HPR} = \frac{\text{Ending Value} – \text{Beginning Value} + \text{Income}}{\text{Beginning Value}}

 

Where:

  • Final Price: The final price of the investment at the end of the holding period.
  • Original Price: The initial value of the investment at the start of the holding period.
  • Income: Any income received during the holding period (such as dividends, interest, or other distributions).

 


Understanding the Components
  • Original Price: This is the price at which the asset or security is initially purchased. For example, if you buy a stock at $100 per share, the beginning value is $100.
  • Final Price: This is the price of the investment at the end of the holding period. For instance, if the stock price has risen to $120 by the end of the year, the ending value would be $120.
  • Income: This includes any dividends, interest, or other distributions received during the holding period. For example, if the stock paid $5 in dividends over the year, this income would be added to the formula.

 


Examples of Holding Period Return (HPR)

Example 1: Stock Investment with Dividends

Suppose an investor buys 100 shares of a stock for $50 per share at the beginning of the year. During the year, the stock pays $2 per share in dividends, and by the end of the year, the stock price rises to $60 per share.

  • Beginning Value = $50 × 100 shares = $5,000
  • Ending Value = $60 × 100 shares = $6,000
  • Income = $2 × 100 shares = $200 (dividends received)

Now, plug the values into the HPR formula:

 

HPR=6,0005,000+2005,000=1,2005,000=0.24 or 24%\text{HPR} = \frac{6,000 – 5,000 + 200}{5,000} = \frac{1,200}{5,000} = 0.24 \text{ or } 24\%

 

In this case, the Holding Period Return is 24%, meaning the investor achieved a 24% return on the investment over the year, considering both capital appreciation and dividends.

 

Example 2: Bond Investment with Interest

Let’s assume an investor purchases a bond for $1,000. Over the next year, the bond pays $50 in interest (coupon payment), and the price of the bond rises to $1,050.

  • Beginning Value = $1,000
  • Ending Value = $1,050
  • Income = $50 (interest received)

Now, apply the HPR formula:

 

HPR=1,0501,000+501,000=1001,000=0.10 or 10%\text{HPR} = \frac{1,050 – 1,000 + 50}{1,000} = \frac{100}{1,000} = 0.10 \text{ or } 10\%

 

In this case, the Holding Period Return is 10%.

 


Significance and Uses of Holding Period Return

The Holding Period Return is widely used for several reasons:

  • Performance Evaluation: HPR helps investors assess how well their investments have performed over a given period, taking into account both price appreciation and income received.
  • Comparison of Investments: Since HPR can be calculated for various types of investments (stocks, bonds, real estate, etc.), it allows for a direct comparison between different assets or portfolios to evaluate which has provided the better return over the same period.
  • Risk-Adjusted Comparison: HPR can be used in conjunction with risk measures (like standard deviation or beta) to evaluate returns relative to the level of risk taken. This helps investors in decision-making by comparing not only returns but also the associated risks.
  • Annualizing the Return: While HPR calculates the return for a specific holding period, it can be annualized to allow comparison between investments held for different lengths of time. This is particularly useful if investments are held for periods shorter or longer than one year.

 


Annualizing Holding Period Return (for non-annual periods)

When an investment is held for less than or more than a year, it is common to annualize the holding period return to make it comparable to annualized returns from other investments. The annualization process adjusts the return to reflect a full year, assuming the investment’s performance over the holding period would continue at the same rate.

To annualize a return, you can use the following formula:

 

Annualized HPR=(1+HPR)1n1\text{Annualized HPR} = \left(1 + \text{HPR}\right)^{\frac{1}{n}} – 1

 

Where:

  • HPR is the holding period return for the investment.
  • n is the number of years (or fractions of a year) the investment was held.

 

Example: Annualizing a Six-Month Return

Let’s say an investor has a holding period return of 10% for an investment held for 6 months. To annualize the return, use the formula:

 

Annualized HPR=(1+0.10)10.51=1.1021=1.211=0.21 or 21%\text{Annualized HPR} = (1 + 0.10)^{\frac{1}{0.5}} – 1 = 1.10^2 – 1 = 1.21 – 1 = 0.21 \text{ or } 21\%

 

In this example, the annualized holding period return is 21%, assuming the same performance would continue for the full year.

 


Limitations of Holding Period Return

While HPR is a useful measure, it has some limitations:

  • Does Not Account for Compounding: If the investment involves reinvestment of income (such as dividends or interest), HPR does not account for the compounding effect unless the income is reinvested during the holding period.
  • Non-Standardized Time Frame: Since the holding period can vary significantly (from days to years), HPR doesn’t provide a standardized way to compare investments over different time periods unless the return is annualized.
  • Does Not Factor in Risk: HPR focuses on the return of an investment but does not directly measure the risk taken to achieve that return. It can be misleading when comparing investments with different risk profiles.
  • Excludes Transaction Costs: The formula assumes no transaction costs (such as brokerage fees), taxes, or other expenses, which could affect the net return.

 


Real-World Application of HPR

HPR is often used in the following scenarios:

  • Equity and Fixed Income Investment Performance: Investors and portfolio managers use HPR to assess the return on stocks, bonds, or mutual funds over a specific period, including dividends, interest, and capital gains.
  • Real Estate Investments: HPR can be used to calculate the total return on real estate investments, considering both rental income and changes in property value.
  • Private Equity: HPR is often applied to investments in private equity, where investors want to evaluate the overall return over the period they held the investment, factoring in distributions and changes in value.

 


Conclusion

The Holding Period Return (HPR) is an essential metric for measuring the total return of an investment over a specific period. By including both income and capital gains or losses, HPR provides a comprehensive picture of an investment’s performance. While HPR is a simple and effective tool for performance assessment, investors should be aware of its limitations, including its lack of consideration for compounding, risk, and transaction costs. Annualizing the return can make it more comparable to other investments held over different periods. HPR remains a fundamental calculation for comparing the performance of various assets and for evaluating the success of investment strategies.

 


Formula

 

$$\begin{aligned} HPR\; &= \left [ Final\;Price\;-\;Original\;Price\;+\;Income \over Original\;Price \right ] \\\\ &= \;\left [ Capital\;Gain\;+\;Dividends \over Original\;Price \right ] \end{aligned}$$

 


Holding Period Return (HPR)

 

Holding Period Return (HPR): %

 

Compound Interest

 

Market Capitalisation

Franking (Imputation) Credits

 

Notes

As dividends are paid after a company has paid it’s company tax, the dividend may contain a franking (imputation) credit.

If the dividend is fully franked (100%) investors are entitled to receive the full credit of the tax paid on the dividend as franking (imputation) credits.

Depending on an investors’ individual circumstances, franking credits may be used to decrease the income tax payable by the investor or potentially be received by the investor as a tax refund.

 


Formula

$$  Franking\;Credit = Franked\;Dividend \times \left (Company\;Tax\;Rate \over 1-Company\;Tax\;Rate \right ) $$

 


Calculator

 

 

 


See also: Dividends

Standard Orders


Amount Type

  • Quantity
  • Value

 


Order Types

There are primarily two types of orders placed on the market.

  1. Market Orders
  2. Limit Orders

 


Market Orders

  • Executes at the best available price on the market.
  • Focuses on speed of execution.
  • May convert to a limit order in the event that insufficient quantity exists at market price.

 


Market to Limit Orders

  • The order starts filling at market price. In the event that there is insufficient quantity available at market price, the order may convert to a limit order and remain in the market until fulfilled at that price.

 


Limit Orders

  • Executes at the price specified.

 


Price per Unit ($)

  • Only applicable to limit orders
  • Price you wish to buy or sell each unit.

 


Duration

  • Good For Day: The order will remain in the market until market closure on the day.
  • Good Till Cancelled: The order will remain in the market until such time as it is cancelled.
  • Good Till Date: The order will remain in the market until market closure of the specified date.

Dividends

 

Notes

A payment paid regularly by a company to its shareholders out of its profits (or reserves). Interim dividends are generally paid out of surplus profits (reserved) of the previous years, whereas final dividends are declared and paid out on an annual basis after the earnings are known for that financial year. Additionally, companies may pay a bonus dividend.

 

  • Interim Dividend
  • Bonus Dividend
  • Final Dividend

 

A company typically divides its profits between itself and its shareholders. Distributions represent a portion of the profits a company decides to give to its shareholders, while retained earnings represent the portion of profits that a company chooses to keep. Companies choose to share profits in the form of dividends because it encourages shareholders to continue investing in the company. Understanding the transactions pertaining to dividends and retained earnings helps you know the effects of the transactions on a company’s financial statements.

 

 


 

Ex-Dividend Date

The ex-dividend date occurs one business day before the company’s Record Date.

Important: To be entitled to the dividend, the buyer needs to purchase the shares prior to the ex-dividend date! If you purchase shares on the ex-dividend date, the seller will be entitled to the dividend payment.

 


 

Record Date

The record date is 5.00pm on the date a company closes its share register to determine which shareholders are entitled to receive the current dividend. It is the date where all changes to registration details must be finalised.

 


 

Dividend Entitlement

 

 


 

Formula

 

$$\begin{aligned} Dividend\;Yield\; &=\;\left [ (Interim\;Dividend + Final\;Dividend) \over Current\;Share\;Price\right ] \;*\;100\;\\\\\ &= \;\left [ Dividends \over Current\;Share\;Price \right ] \;*\;100\;\end{aligned}$$

 


Dividend Yield

 

* Interim dividend per share (i.e. 25 cents per share = 0.25).
* Final dividend per share (i.e. 30 cents per share = 0.30).
Dividend Yield: %

 


See also: Franking (Imputation) Credits

Online Trading Platforms

 

 

Useful Links

 

IndexUseful Links
1ABC - Australian Broadcasting Corporation
2ABN Lookup
3ABS - Australian Bureau of Statistics
4ABS – Australian Bureau of Statistics (Life Tables)
5AFR - Australian Financial Review
6Al Jazeera
7AMP - Australian Mutual Provident Society
8Argo Blockchain
9ARK Invest
10ASIC - Australian Securities & Investments Commission
11ASIC - MoneySmart
12ASX - Australian Securities Exchange
13ATO - Australian Taxation Office
14AUSTRAC - Australian Transaction Reports and Analysis Centre
15Australian Government - Australian Office of Financial Management
16Australian Government - Bonds
17Australian Government - data.gov.au
18Australian Government - Foreign Investment Review Board (FIRB)
19Australian Government - Office of the Australian Information Commissioner (OAIC)
20Australian Government - Takeovers Panel
21Australian Government - The Treasury
22Australian Investor
23Australian Stock Report
24Bank of International Settlements
25BBC - British Broadcasting Corporation
26Bitmain
27BlackRock
28Blackstone
29Blockchain.com
30Bloomberg
31Bridgewater Associates
32BTC Markets
33Bullseye Option
34Business Insider
35Canstar
36Canyon Capital Advisors
37Capital Link
38Cboe - Chicago Board Options Exchange
39CBS - Columbia Broadcasting System
40CGTN - China Global Television Network
41Charles Schwab
42China Beige Book
43CipherTrace
44CitiFirst
45CMB International
46CME Group
47CNA - Channel News Asia
48CNBC - Consumer News and Business Channel
49CNN - Cable News Network
50Council for Inclusive Capitalism
51CoinDesk
52CoinGecko
53CoinMarketCap
54Connor Broadley
55Corporate Finance Institute
56crypto.com
57CryptoCompare
58CryptoSlate
59DappRadar
60Decentral
61DeListed Australia
62FactSet
63Fidelity International
64FMP - Financial Modeling Prep
65FNArena
66Forager Funds Management
67Forbes
68Foundry
69Fox News
70Franklin Templeton
71Fresh Equities
72FT - Financial Times
73Gemini
74Global Source Partners
75High Pay Centre
76HotCopper
77ICE - Intercontinental Exchange
78InfoChoice
79International Monetary Fund (IMF)
80International Swaps and Derivatives Association (ISDA)
81Investing.com
82Investment Week
83Investopedia
84ISO - International Organization for Standardization
85John Hancock Investment Management
86Kingswood
87Knight Frank - The Wealth Report
88ListCorp
89LSEG - London Stock Exchange Group of Companies (formerly Refinitiv)
90Mainstay Capital Markets Consultants
91Market Index
92marketcap.one
93MarketGauge
94MarketWatch
95Mashreq Capital
96Mercer
97Morningstar
98MSCI - Morgan Stanley Capital International
99Ninety One
100Oaktree Capital
101OECD - The Organisation for Economic Co-operation and Development
102Office for National Statistics (UK)
103Optimize Advisors
104Our World in Data
105Pantera Capital
106Pepperstone
107PIMCO
108PineBridge Investments
109Prestige Economics
110Rivkin
111Sharecafe
112Sky News Australia
113Small Caps
114Stock Analysis
115Sure Dividend
116Switzer Daily
117The Bull
118The Economist
119The Global CIO Office
120The Hedge Fund Journal
121The Motley Fool
122Options Clearing Corporation (OCC)
123The Options Edge
124The Options Industry Council (OIC)
125Thomson Reuters
126Thornburg Investment Management
127Traders Circle
128TradingHours.com
129TradingView
130Investor.gov - U.S. Securities and Exchange Commission
131VANDA Insights
132Vanguard
133Vanguard Australia
134VectorVest Australia
135WFE - World Federation of Exchanges
136World Bank
137WSJ - The Wall Street Journal
138Yahoo Finance

Beta Coefficient (β)

Notes

The Beta Coefficient measures the volatility of a particular share (systematic risk) in comparison to the market (unsystematic risk). It describes the sensitivity of a security’s returns in response to swings in the market.

Systematic risk is the underlying risk that affects the entire market. Large changes in macroeconomic variables, such as interest rates, inflation, GDP, or foreign exchange, are changes that impact the broader market and that cannot be avoided through diversification. The Beta coefficient relates ‘the market’ systematic risk to ‘stock-specific’ unsystematic risk by comparing the rate of change between ‘the market’ and ‘stock-specific’ returns.

Statistically, beta represents the slope of the line through a regression of data points from an individual stock’s returns against those of the market.

The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market, and how volatile or risky it is compared to the market.

For beta to provide any insight, the ‘market’ used as a benchmark should be related to the stock.

For example, calculating a bond ETF’s beta by using the S&P 500 as the benchmark isn’t helpful because bonds and stocks are too dissimilar. The benchmark or market return used in the calculation needs to be related to the stock because an investor is trying to gauge how much risk a stock is adding to a portfolio.

A stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, but it also doesn’t increase the theoretical potential for greater returns.

 

The beta of the market portfolio is always 1.0

  • β = 1.0  (The security has the same volatility as the market as a whole.)
  • β > 1.0  (Aggressive investment with volatility of returns greater than the market.)
  • β < 1.0  (Defensive investment with volatility of returns less than the market.)
  • β < 0.0  (An investment with returns that are negatively correlated with the returns of the market.)

 

 


Formula

 

$$  Beta\;Coefficient\;(β)  = \left [Covariance (rp, rb) \over Variance (rb) \right ]$$

 


Beta Coefficient

 

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Beta (β) Value: