TAGOLOAN Community College MODULE WEEK NO.

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Baluarte, Tagoloan, Misamis Oriental
University Tel.No. (08822)740-835/(088)5671-215
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College of Business Administration

COURSE Code: Investment and Portfolio Management
2nd Semester of A.Y. 2021-2022

Introduction

This course is designed to help learners understand how to choose among alternative investment
assets, and know that while investors are in the selection process, they will learn to estimate and
evaluate the expected return trade-offs for the alternative investments available. The learners will

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likewise understand how to measure the rate of return in an investment accurately.

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Rationale

● Learning alternative investments assets provides greater opportunity for managers to enhance
portfolio returns compared to the opportunities available in traditional asset classes like listed
equities and fixed interest. This can also provide greater diversification and more consistent
returns when added to a portfolio of traditional assets. By enhancing diversification, managers
will be able to provide better downside protection for client portfolios.
● Assessing the return trade off of all positions can provide insight on whether a portfolio assumes
enough risk to achieve long-term return objectives or if the risk levels are too high with the
existing mix of assets.
● Learning how to measure rate of return could help every investor better understand how well
their business is doing and which areas could use improvement to help them achieve your goals.
Intended Learning Outcomes

After discussion, students should be able to:

A. Explain the holding period process;

B. Convert holding period investment to holding period yield; and

C. Differentiate the purpose of computing arithmetic mean from geometric mean.

Activity

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ILO1
ILO2
Online
OnlineDiscussion
Discussion
Provide handout
Provide through
handout google
through classroom
google classroom
Online
OnlineProblem-solving/exercise
Problem-solving/exercise

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Online instruction

COU Provide handout through google classroom

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Discussion

Hello guys, welcome to the second session of this subject. In module 1, we learned the definition of
Investment and it differs from speculation. This time, you’ll encounter new and exciting lesson which
will help you discover what is a holding period and convert this to yield. Also, you will learn about
arithmetic and geometric mean. Prepare your scientific calculator. Don’t worry, this is very easy
because I will help you get through it. Read first, learn and apply the given examples. Enjoy learning!

Measures of Return
● Measure:
a. Historical rate of return on an individual investment over the time period the investment is
held;
b. Average historical rate of return for an individual investment over a number of time periods;
and
c. Average rate of return for a portfolio of investment.
● When we invest, we defer current consumption in order to add to our wealth so that we can
consume more in the future. Therefore, when we talk about a return on an investment, we are
concerned with the change in wealth resulting from this investment. This change in wealth can
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either be due to cash inflows, such as interest or dividends, or caused by a change in the price of the
asset (positive or negative).
● Example: If you commit Php1,000 to an investment at the beginning of the year and you get back
Php1,100 at the end of the year, what is your return for the period? The period during which you
own an investment is called its holding period, and the return for that period is the holding period
return (HPR). The HPR then is computed as follows:
HPR = Ending Value of Investment
Beginning Value of Investment
= Php1,100 = 1.10
Php1,000
● The HPR value will always be zero or greater – that is, it can never be negative value. A value greater
than 1.0 reflects an increase in your wealth, which means that you received a positive rate of return
during the period. A value less than zero means you suffered a decline in wealth, which indicates
you had a negative return during the period.
● Investors generally evaluate returns in percentage terms on an annual basis. The first step in
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converting an HPR to an annual percentage rate is to derive a percentage return, referred to as the

MOD holding period yield (HPY). The HPY is equal to the HPR minus 1.

ULE HPY = HPR – 1

In our example:

HPY = 1.10 – 1 = .10

= 10%
To derive an annual HPY, you compute an annual HPR and subtract 1. Annual HPR is found by:

Annual HPR = HPR1/n where: n = number of years the investment is held.

Consider an investment that cost Php2,000 and is worth Php3,000 after being held for two years:

HPR = Ending Value of Investment = Php3,000

Beginning Value of Investment Php2,000
Annual HPR = 1.50
= 1.501/n
= 1.501/2
= 1.2247
Annual HPY = 1.2247 - 1 = .2247 = 22.47%

If you experience a decline in your wealth value, the computation is as follows:

HPR = Ending Value = Php2,000 = .67

Beginning Value Php3,000
HPY = .67 – 1 = -.33 = -33%

A multiple-year loss over two years would be computed as follows:

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HPR = Ending Value = Php 750 = .75

Beginning Value Php1,000
Annual HPR = (.75)1/n = .751/2
= .866
Annual HPY = .866 – 1.00 = .143 = -14.3%
In contrast, consider an investment of Php5,000 held for only six months that earned a return of
Php500:
HPR = 5500 = 1.10
5000
Annual HPR = (1.10)1/.5
= 1.21
Annual HPY = 1.21 – 1.00 = .21 = 21%

Note that we made some implicit assumptions when converting the six-month HPY to an annual
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basis. This annualized holding period yield computation assumes a constant annual yield for each

MOD year. In the two-year investment, we assumed a 22.47 percent rate of return each year,

ULE compounded for the whole year. That is, we assumed that the rate of return during the first half of
the year is likewise earned on the value at the end of the first six months. The ending value of the
investment can be the result of a positive or negative change in price for the investment alone.
Ending value includes the value of everything related to the investment.
● MEAN HISTORICAL RETURNS: Now that we have computed the HPY for a single investment for a
single year, we want to consider mean rates of return for a single investment and for a portfolio of
investments. Over a number of years, a single investment will likely give high rates of return during
some years and low rates of return, or possibly negative rates of return, during others. You can
derive a summary figure by computing the mean annual rate of return (its HPY) for this investment
over some period of time.
● Single Investment: Given a set of annual rates of return (HPYs) for an individual investment, there
are two summary measures of return performance. The first is the arithmetic mean return; the
second is the geometric mean return. To find the arithmetic mean (AM), the sum (∑) of annual HPYs
is divided by the number of years (n) as follows:
AM = ∑HPY/n

Where: ∑HPY = the sum of annual holding period yields

An alternative computation, the geometric mean (GM), is the nth root of the product of the HPRs for n
years minus 1.

Where: GM = [HPR]1/n -1
Example:
Year Beginning Value Ending Value HPR HPY

1 100 115 1.15 .15

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2 115 138 1.20 .20

3 138 110 .80 -.20

AM = [(.15)+(.20)+(-.20)]/3 GM = [(1.15)x(1.20)x(.80) 1/3-1 ]

= .15/3 = 1.1041/3 -1
= .05 = 1.03353- 1
= 5% = .03353
= 3.353%
Investors are typically concerned with long-term performance when comparing alternative
investments. GM is considered a superior measure of the long-term mean rate of return because it indicates
the compound annual rate of return based on the ending value of the investment versus its beginning value.
Specifically, the first example, if we compounded 3.353% for three years, 3 (1.03353) , we would get an
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RSE Although the arithmetic average provides a good indication of the expected rate of return for
MOD an investment during a future individual year, it is biased upward if you are attempting to measure
ULE an asset’s long-term performance. This is obvious for a volatile security. Consider for example, a
security that increases in price from $50 to $100 during year 1 and drops back to $50 during year 2.
The annual HPYs would be:

Year Beginning Value Ending Value HPR HPY

1 50 100 2.00 1.00

2 100 50 .50 -.50

This would give an AM rate of:

[(1.00)+(-.50)]/2 = .50/2
= .25 = 25%
This investment brought no change in wealth and therefore no return, yet the AM rate of return is
computed to be 25%.

The GM rate of return would be:

(2.00)x(.50) 1/2 - 1 = (1.00) 1/2
= 1.00 – 1 = 0%
This answer of a 0 percent rate of return accurately measures the fact that there was no change in

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wealth from this investment over the two-period.

● When rates of return are the same for all years, the GM will be equal to the AM. If the rates of
return vary over the years, the GM will always be lower than the AM.
● AM is best used as an expected value for an individual year, while GM is best measure of long-term
performance since it measures the compound annual rate for the asset being measured.
● The weights used in computing the average are the relative beginning market values for each
investment; this referred to as value-weighted mean rate of return. (shown in the next exhibit).

COU Computation of Holding Period Yield for a Portfolio

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Investment HPR HPY
Shares Price Market Value Price Value Weight HPY

A 100,000 Php10 Php1,000,000 Php12 Php1,200,000 1.20 .20 .05 .01

B 200,000 20 4,000,000 21 4,200,000 1.05 .05 .20 .01

C 500,000 30 15,000,000 33 16,500,000 1.10 .10 .75 .075

Total Php20,000,000 Php21,900,000 .095

HPR = 21,900,000 =1.095

20,000,000

HPY= 1.095 – 1

= .095 = 9.5%

Exercise
Instruction. Submit your answers through Google Classroom or FB Messenger.
Part I. Identification. Identity the term/terms described by each of the following statements.
1. When we talk about a return on an investment, we are concerned with the change in wealth resulting from_________________.
2.___________________ The period during which you own an investment.
3. The return of holding period is called____________________.
4.___________________ The ideal value of holding period return.
5.___________________ The value that indicates you have a negative return during the period.

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6.___________________ This is equivalent to the HPR minus 1
7. When an annual percentage rate is to derive a percentage return is referred to as ________________.
8.___________________ The second summary measure of return performance.
9.___________________ It is considered a superior measure of the long-term mean rate of return.
10.__________________ A symbol that stands for number of years the investment is held.
Part II. Problem-solving, show your solution.
1. Consider an investment that cost Php3,000 and is worth Php4,000 after being held for 3 years. Compute the Annual HPR
and Annual HPY.
2. Find the HPR and HPY from Php4000 as your Beginning Value of Investment with Php3,500 Ending Value.
3. From value provided in the table below, fill in the missing value and calculate the AM and GM.

Yea Beginning Value Ending Value HPR HPY

r

1 200 255

2 255 300

3 300 250

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4. Determine the HPR and HPY based on the data below after completing the blank boxes.

Computation of Holding Period Yield for a Portfolio

Ending
No. of Beginning Beginning Ending Market Weighted
Investment Market HPR HPY
Shares Price Market Value Price Weight HPY
Value

A 50,000 Php8 Php 400,000 Php20 Php

B 100,000 21 2,100,000 20

C 300,000 30 9,000,000 35

Total Php11,500,000 Php

Assessment

Google Classroom

Reflection

Part III. Make your answers brief and concise.

● If the value of your HPR was negative, what is its implication to your business and
what are the possible ways in order to gain positive rate of return?
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● It is said that when rates of return are the same for all years, the GM will be equal to
the AM. If the rates of return vary over the years, will the GM be lower or higher than
the AM?
● What is more important, managing risk or managing return?

Resources and Additional Resources

● Analysis of Investment and Management of Portfolios by Keith C Brown and
Frank K Reilly (Textbook)
● Investment Analysis and Portfolio Management by Japhur (Online Book)

Noel Q. Formoso, DM
Assistant Professor lV
formosonoel1003@gmail.com
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