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CHAPTER 19: Returns, Index Numbers and Inflation

This document discusses key concepts related to investment returns, inflation, and index numbers. It defines nominal and real rates of return, with nominal including inflation and real excluding it. The Fisher equation is presented as a way to convert between nominal and real rates. Three types of price indexes are outlined: simple price index, unweighted aggregate price index, and weighted aggregate price index. The weighted index is further broken down into Laspeyres and Paasche indexes, which differ in whether past or present quantities are used to weight prices. Examples are given for calculating Laspeyres and Paasche indexes.

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122 views2 pages

CHAPTER 19: Returns, Index Numbers and Inflation

This document discusses key concepts related to investment returns, inflation, and index numbers. It defines nominal and real rates of return, with nominal including inflation and real excluding it. The Fisher equation is presented as a way to convert between nominal and real rates. Three types of price indexes are outlined: simple price index, unweighted aggregate price index, and weighted aggregate price index. The weighted index is further broken down into Laspeyres and Paasche indexes, which differ in whether past or present quantities are used to weight prices. Examples are given for calculating Laspeyres and Paasche indexes.

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PutriOctafia
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We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 19: Returns, Index Numbers and Inflation

Investment Return
$" %$"−1 ()*
Capital Gains Yield !" = Income Yield
$"−1

Pt = Price of the asset at times t (current)


Pt-1 = Price of the asset at times t-1 (prior)
It = Income distributed during the investment period

Nominal vs Real rate of return
Nominal (R) = includes inflation
Real (r) = excludes inflation
If 100.000 à 105.000 = as if it increases by 5%, but it’s not


The Fisher equation
1+R
1+- =
/(0

Index number = easy-to-interpret numerical value that reflects a percentage change in price or
quantity from a base value

The base value for a price index is set equal to 100 for the selected period
If the price index = 125 à the price has grown by 25% from the base year
If the price index = 90 à the price has dropped by 10% from the base year


3 types of price index :
1. Simple price index
Pt
SPI = 6 100
$5

2. Unweighted aggregate price index

∑Pit
UAPI = 6 100
∑$<5




Year Aqua Vit Ades
2016 2000 1800 2500
2017 2500 1500 3000
2018 3000 2000 2500

Price index for 2016?

3. Weighted aggregate price index = doesn’t treat price of different item equally
2 types : Laspeyres and Paasche

∑Pt x Qo
Laspeyres = 6 100
∑@A B CA

∑Pt x Qn
Paasche = = 6 100 à if not mentioned, use the latest year for n
∑@E B CF

Numbers of Bottles Sold
Year Aqua Vit Ades
2016 40 65 60
2017 30 80 50
2018 45 50 55

Laspeyres
Year Weighted Price Laspeyres Index
2016 (2000 x 40) + (1800 x 65) + (2500 x 60) =

2017

2018


Paasche
Year Weighted Price Paasche Index
2016 (2000 x 45) + (1800 x 50) + (2500 x 55) =

2017

2018

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