Financial

Fundamentals

Average Return

$R_{t,t+1} = {P_{t+1}-P_t \over P_t}$

Average return is misleading because it disregards volatility.

Logarithmic Return

Often used because percentages can get very small.

$r_t = log(1+R_t) = log{ P_t \over P_{t-1}} = log P_t - log P_{t-1}$

Compounded Return

$R_{t,t+2} = (1+R_{t,t+1})(1+R_{t+1,t+2})-1$

We can get the annualized returns by repeating this for every monthly return.