Financial returns

1. Financial returns

Great job so far! As this is a finance oriented course, there are some financial terms and mathematics that you will have to be comfortable with to do the exercises. One of these is the concept of returns. It will be easiest to demonstrate this through an example.

2. Stock returns

Suppose you have 50 dollars worth of Apple stock. If that stock earns you a 10% return in January, how much money do you have at the end of the month? The math for this isn't complicated! 10% of 50 is 5 dollars, so by adding this to your existing 50 dollars, you now have 55 dollars. Great! Now, let's think about this a different way.

3. Stock returns

At the end of the month, you have 100% of your original cash, the 50 dollars, and now you have an extra 10%. In total, you now have 110% of your original value.

4. Stock returns

Dividing this by 100 to turn percentages into decimals gives us the following equation. The 1-point-10 you see there is important.

5. Stock returns

You will use this value as a return multiplier. Multiplying your original 50 dollars by

6. Stock returns

this return multiplier gives us the correct answer of 55 dollars. Time to generalize this. The general formula in terms of variables for the return multiplier is the following: One, plus the interest rate divided by 100 to change it to a decimal. Using this, we can then say that the total amount at the next period is the original amount times the multiplier.

7. Stock returns - multiple periods

This example can easily extend to multiple periods. For example, if you also earned an extra 5% in February, how much money would you have at the end of February? Simple! Take the amount at the end of January, 55 dollars, and multiply this by the return multiplier corresponding to 5%, 1-point-05. But wait, if you write this math another way, you can see that this is nothing more than the original 50 dollars, times the return multiplier for January, times the return multiplier for February. To move two months forward, we multiply our original 50 dollar by the return multipliers for those two months.

8. Let's practice!

Now it's your turn! The next few exercises will test your knowledge of financial returns in combination with variables!

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