Scenario 1: Suppose Diana, Thor and Loki all invested in SPDR S\&P 500 Exchange Traded Fund (ETF) from January 2015 through December 2019. Following is the actual annual total return for the fund (NOTE THAT THE YEARS ARE ORDERED IN MOST RECENT TO LAST) During 2015, the fund returned a 1.34\%. Returns for the fund during 2016, 2017, 2018, and 2019 are 11.80%,21.69%,4.45%, and 31.29%, respectively. While Diana is following a dollar cost average approach in investing (i.e. investing a modest amount of money over time), Thor and Loki are trying to time the market in their investment. Following are their cash inflows and outflows: Diana invested $1,000 into SPY at the beginning of each year. As such, she deposited $1,000 at the beginning of 2015,2016,2017,2018, and 2019. Thor deposited $7,000 into an investment account at the beginning of 2015 . He later withdrew $6,500 from that account at the beginning of 2016 and again withdrew another $500 at the beginning of 2017. Upon seeing great historical returns that SPY generated in 2016, and 2017, he deposited an additional amount of $5,000 to the account at the beginning of 2018 . At the beginning of 2019, Thor made no additional investment into the account. On the other hand, Loki started out his investment with $50 at the beginning of 2015 . Later on, he deposited an additional $500 at the beginning of 2016 and $2,400 at the beginning of 2017 . Loki withdrew $500 at the beginning of 2018 but deposited an additional $2,550 at the beginning of 2019. All 3 investors liquidated their holdings and cashed out of their investments at the end of 2019. Calculate the following: The arithmetic average return and the geometric average return for SPY i) The dollar-weighted average return for Diana, Thor, and Loki. ii) In plain English, using the number that you have calculated in (i) and (ii), interpret each average return measure (for Diana ONLY) that you have calculated (i_e. what does each measure tell you?) Scenario 1: Suppose Diana, Thor and Loki all invested in SPDR S\&P 500 Exchange Traded Fund (ETF) from January 2015 through December 2019. Following is the actual annual total return for the fund (NOTE THAT THE YEARS ARE ORDERED IN MOST RECENT TO LAST) During 2015, the fund returned a 1.34\%. Returns for the fund during 2016, 2017, 2018, and 2019 are 11.80%,21.69%,4.45%, and 31.29%, respectively. While Diana is following a dollar cost average approach in investing (i.e. investing a modest amount of money over time), Thor and Loki are trying to time the market in their investment. Following are their cash inflows and outflows: Diana invested $1,000 into SPY at the beginning of each year. As such, she deposited $1,000 at the beginning of 2015,2016,2017,2018, and 2019. Thor deposited $7,000 into an investment account at the beginning of 2015 . He later withdrew $6,500 from that account at the beginning of 2016 and again withdrew another $500 at the beginning of 2017. Upon seeing great historical returns that SPY generated in 2016, and 2017, he deposited an additional amount of $5,000 to the account at the beginning of 2018 . At the beginning of 2019, Thor made no additional investment into the account. On the other hand, Loki started out his investment with $50 at the beginning of 2015 . Later on, he deposited an additional $500 at the beginning of 2016 and $2,400 at the beginning of 2017 . Loki withdrew $500 at the beginning of 2018 but deposited an additional $2,550 at the beginning of 2019. All 3 investors liquidated their holdings and cashed out of their investments at the end of 2019. Calculate the following: The arithmetic average return and the geometric average return for SPY i) The dollar-weighted average return for Diana, Thor, and Loki. ii) In plain English, using the number that you have calculated in (i) and (ii), interpret each average return measure (for Diana ONLY) that you have calculated (i_e. what does each measure tell you?)
