Returns

What this video covers

• Why the Sharpe ratio uses standard deviation (total risk) for standalone portfolios while alpha uses beta (systematic risk) for manager skill evaluation against capital asset pricing model (CAPM) expectations
• How to calculate the Sharpe ratio: portfolio return minus risk-free rate, divided by standard deviation, and what a negative result signals
• How to calculate alpha: actual return minus CAPM expected return, and why alpha is NOT simply portfolio return minus market return
• Why time-weighted return (TWR) eliminates cash flow effects to measure manager skill, while dollar-weighted return (DWR) reflects the investor's actual experience and equals internal rate of return (IRR)
• When Global Investment Performance Standards (GIPS) mandates TWR for reporting, and why DWR diverges from TWR when clients deposit or withdraw funds at market turning points
• Why geometric mean, not arithmetic mean, must be used for multi-year returns, and why holding period return (HPR) must be annualized before any comparison
• How to compute tax-equivalent yield by dividing tax-exempt yield by one minus the tax rate, and how to approximate real return by subtracting inflation from nominal return