Another perspective on HPY (Annual returns)

Let’s use an example of a house. You bought a house 42 years ago for $10,000 and just sold it for $80,000.

If we use the standard way of calculating the HPR, your profit is %700. Woo Hoo! Hold on, what about the past 8 years? Didn’t you spend any money to eat?
HPR = 80,000 / 10,000 = 8.0
HPY = HPR - 1
= (8.0 -1) = 7.0 = 700%

The proper way of doing it is to do it below. Now, you’ve got a more reasonable number which is 5.08%. So, if you’re investments takes a long time, annualize them.

HPY = [(HPR)1/n - 1] x 100
= [(8.0)^1/42 - 1] x 100
= (1.050758 - 1) x 100
= (0.050758) x 100
= 5.08% Annually

Annual Holding Period Yield

Now we are getting to the nitty gritty details.

Previously, we were talking about Holding Period Return with no sense of the time factor. Now, we are going to put the time factor in with the Annual Holding Period Yield and the calculation is as below:

Annual HPY = Annual HPR - 1
Annual HPR = HPR to the power of (1/n)
Where n = number of years

Going from the previous example but with some minor modification. Let’s say that after investing $1, in two years, I get $1.50.

Therefore, HPR = 1.5/1 = 1.5
Annual HPR = HPR to the power of (1/n)
= 1.5 power (1/2)
= 1.224

Sorry for the confusion as I haven’t found out how to superscript in my computer.

Master MBA Administration process

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/

Master MBA Administration process

Starting off MBA entries

With the current status of world economy as it is, I’d like to share some of the things I learnt from Masters of Business Administration. Firstly, if you are hoping that it is going to get you that big promotion immediately, sorry to say, ‘Not gonna happen!’. But if you are aiming to learn something especially, the value and maintenance of your money and your wealth then this is worth every penny. We’ll start of with some investment information and strategies.