Annual Rate of Return

Continuing from the previous discussion, we will introduce a new variable called Holding Period Yield (HPY). Let's say after investing $1 for a year, I get $1.5. Therefore HPR (Holding Period Return) is 1.5/1 = 1.5.
HPY = HPR -1
in this case
1.5-1
= 0.5
In percentage, Holding Period Yield is 50%

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Historical Rate of Return

One of the measures of Historical Rate of Return is the Holding Period Return (HPR)

HPR = Ending Value/Beginning Value

An example is that I put $1 in the bank and i find that in one year, there is $2 in my account, then my HPR = 2/1 = 2 (this is a really good bank)

If you find that you have $0.5 in your account, then HPR=0.5/1=0.5 (Take out your money dude)

If for some reason, you find that you are in debt, -$0.50 in your account, then HPR = -0.5/5 ( does the name Enron ring a bell?)

In the next post, we'll take a step further and calculate Annual HPR. This is when a good financial calculator is a good investment.

Here is a cool web application which lets you know the historical rate of return of your investment
http://www.tifor.com/

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Some basic investment analysis

Here are some obvious facts,

and so if the rate of interest is 4% per year, when you invest $1.00, next year you should get $1.04. For consumers, the bank will let us know how much is their interest when you sign up with them on any of their products. This is the same for company and government bonds. For investors (such as in stock), there are various calculations which takes into account, company's performance (current and projected), the micro/macroeconomic situation (eg. inflation), government policies and other uncontrollable factors ( eg. natural disasters, unpredictable government leaders).

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