Chapter 1: Rates and Returns

In this section

• Interest Rates as Required Returns, Discount Rates, and Opportunity Costs
  Explore how interest rates function as required returns, discount rates, and reflect opportunity costs, central to asset valuation in finance.
• Real Risk‑Free Rate and Risk Premiums
  Explore the real risk-free rate concept, sources of risk premiums, and how they combine, with illustrative examples, diagrams, and clear definitions.
• Measuring Returns over Time
  Understand the nuances of measuring investment returns across multiple time intervals using discrete, continuous, arithmetic, and geometric methods for accurate performance assessment.
• Money‑Weighted vs. Time‑Weighted Returns
  Compare and contrast the money-weighted and time-weighted rates of return, understand their relevance in evaluating portfolios, and identify when each approach is most appropriate.
• Annualized and Continuously Compounded Returns
  Explore how to annualize returns for consistent comparison, delve into effective annual rates vs. nominal rates, and understand continuous compounding fundamentals for both fixed-income and derivative pricing frameworks.
• Comparison of Major Return Measures
  Explore the major return metrics used in finance—Arithmetic Mean, Geometric Mean, Money-Weighted Return (MWRR), Time-Weighted Return (TWRR), Annualized Return, and more—to evaluate performance, reflect personal experience, and model investment outcomes effectively.
• Nominal vs. Real Interest Rates
  Explore the difference between nominal and real interest rates, their determination, and practical implications for investment and policy decisions, supported by the Fisher equation and real-world examples.