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|How to Get Periodic Return In Corporate Finance|
How do you calculate the periodic return?
Invest in a financial asset we have to evaluate that acid, and we evaluate based on return and the basis of risk because both the risk and periodic return factor is equally important.
If you are investing in any financial asset, you ought to know how much return; it would give after a certain period, and how much risk is involved in it?
We would see three methods to calculate the return that is the periodic return arithmetic mean return and geometric mean return,
And to calculate risk we would observe the methods like standard deviation and beta where the standard deviation would tell us about the individual risk involved in the asset,
And the beta value will give us a proper risk evaluation in terms of the market, as well as the risk involved in that financial asset.
It will give coordination of both the figures. Let’s get started with our periodic periodic return.
What exactly periodic return is, is the return from investment in financial assets over some time. Like, you have invested in any kind of asset whether in bonds, whether in equity.
The return which you would be getting out of it after the period for which you have invested say for one year,
Two years or five years whatever period for which you have invested in that asset after that period is over,
Whatever returns you would be getting out of it, whether in the form of the capital gain or the form of any cash flow,
All those returns would be considered as the periodic return. Now I would make try to make you understand how the return could be in form of a capital gain or how the return could be in the form of cash flows.
Just imagine like the share, share, which you bought the price of rupees. 10. Now the price, after the period for which you have bought that share has been increased to safer.
How do you calculate HPR for a portfolio?
After three years it has increased to rupees 15, the price rise it is about rupees five so that rupees five is your capital gain.
Why is that capital gain occurring? This is occurring because of the increase in the market price of the financial asset in
Which you invested and see like when you would be selling your share or when the period is over, you will be getting a dividend of rupees,
Two what that dividend would be considered as the cash flows.
If the coupons are paid on bond and if the dividends are paid on the share, or whether you are having a preference shares or equity shares whatever is being paid to you as a cache.
That is considered as the cash flow for you, but whatever you gain in the term of the market price increase on market price decrease that is considered as capital gain or a capital loss.
The periodic return would combine all these things whether the cash flows whether the capital gain all that benefits which you would be
Getting after the investment in a particular financial asset, or those benefits would be considered as your periodic return for that period for which you invested.
The characteristics of the periodic return total return on investment are considered including the price changes, as well as the cash flows during the period like
Just imagine if you wanted to consider prices of the same financial assets in two to three countries like in the fund in the Spain market or the Indian market or our market.
How do you calculate HPR for dividends?
You want to consider the price so how would you do that, if the currencies are different, you won’t get the accurate value
Whether you’re making the very you’re calculating the returns from different markets, you have to calculate that in the same currency,
That it provides you with an accurate measure of the returns. The same denomination would also help in comparison to returns from different markets of countries. So this is what he said.
No here’s an example of how to calculate the periodic return, so it’s a very simple example just to give you a gist of how it is done.
Consider a share whose price at the beginning when purchased was dollar 60 right at the end of the year, it’s raised to dollar 65, and dollar three was paid as a dividend.
Assured rich you bought $1 60. Now, you kept that share for one year. And after that, you find that the market price of your share has increased. It has increased to $1 65 so you’re gaining, you’re gaining like what I can.
What I said as capital gain,
You’re gaining dollar five and dollar three was paid you as a dividend, as promised, a dollar tree is what you get as the reward of buying that share.
Now, what would be your periodic return for that year, it would be calculated as the change in price. Plus, cash flow is divided by price at the beginning.
It’s just the change whatever gain you’re having. And that’s why we are considering it, we are dividing it by price at the beginning so at the beginning you would have in dollar 60.
After that, there was a change in the price of dollar five, plus you got a cash flow in the form of a dividend of dollar three.
That’s your periodic return was the point 13 three, or you can say 13.33%, this was the return person which you get after one year.
It’s a very simple method to calculate the return person which you get just you have to know the change in the price,
Whether it is occurring or not, whether it is increasing or decreasing, whatever cash flows you are getting. And what was the price at the beginning?