Total Return Index Calculation

[dannyp123]

Hi,

October 2015 paper, Q4 (iii) asks that the total return on the index over 2011 be calculated.

The formula used in the ASET answer: TRI(t) = (I(t) + (XD(t) - XD(t-1))) / I(t-1) {*}

This formula does not appear in the course notes which is confusing me, the course notes state the formula is:

TRI(t) = TRI(t-1)*(I(t) + XD(t) - XD(t-1)) / I(t-1)

OR

TRI(t) = (I(t) - I(t-1) + XD(t) - XD(t-1)) / I(t-1)

I dont understand why the term TRI(t-1) has been dropped in the answers. I am finding a theme where the connection between the formulas in the course notes don't seem to be applied to the questions, changes are made to them without much commentary. I know the problem is just that I am not following it, but I feel the course notes / and or ASET could provide more helpful commentary to link the two.

Could someone explain why the TRI(t-1) term is dropped? Also where formula {*} is listed in the course notes?

Thanks,
Dan

 

[lyndon46]

Hi Dan
I believe you are mistaken regarding the formula used in the ASET.
That formula is for the return over the year, which is equivalent to TRI(t)/TRI(t-1), not TRI(t) per the 1st formula in your post above.
This is simply a rearrangement of the 2nd formula in your post.
I understand what you’re saying regarding the ASET trying to spell things out more, but if they were to do that for us, I suspect the material would increase substantially.
Sometimes the lack of immediate understanding is good. After you fight up and figure it out, you find yourself better understanding the topic.
Hope this helps.

 

[dannyp123]

Thank you, I think the confusion for me was the difference between calculating an index value (ie. TRI(t)), versus calculating the actual return from the index over a particular time period (TRI(t)/TRI(t-1)).

What you have said has cleared that up for me, thanks.

I still maintain that SP5 CMP and ASET is not as well produced as the other subjects.
CMP: on balance I think there is a little too much assumed knowledge, and could do with some more expounding of ideas / examples of formula use which will occur in exams.
ASET: There is too much regurgitation of core reading, and could be more helpful commentary. Example: April 2015, Q5 (iii) asks for methods to take advantage of an anomaly switch which maintaining no overall market exposure. It lists methods but doesn't actually explain how the method would work - so I am left none-the-wiser.