Explain the following terms:
i. Compound returns
ii. Principal
iii. Rate of return on an investment
iv. Holding period
i. Compound returns are generated when short-term returns are repeatedly reinvested, thereby causing an investment to earn returns on both the initial investment and on past investment returns.
ii. An investor's principal is the value of her initial investment.
iii. The rate of return on investment is calculated by (i) dividing the final value of an investment by the initial investment (one year earlier), and (ii) subtracting one from the ratio.
iv. The time delay between the initial investment and the final withdrawal is referred to as the holding period.
A-head: INVESTMENT RETURNS
Concept: Compound returns, principal, interest, holding period
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