zakenjanei
Dryer sheet wannabe
- Joined
- Feb 1, 2005
- Messages
- 17
When people quote 5 (or 10, 15,...) year
returns, how are these returns being actually computed?
The way I understand it, these numbers are
average returns. For example, let's follow 2
funds over a 5 year period.
Fund 1:
year1: 50%
2: -60%
3: 30%
4: 30%
5: -10%
average 5 year return: ((50+30+30)-(60+10))/5 = 8%
Fund 2:
years 1, 2,3,4,5: 8%
average 5 year return; 8%
The question then is: though both funds have
8% average 5 year returns, have these funds really
performed the same way? Let's suppose you invested
$10K on both funds. Some simple math shows:
fund 1 after 5 years: 9.12K
fund 2 after 5 years: 14.69K
Fund 1 lost $880 while fund 2 gained a hefty $4690
from the same $10K initially invested.
Are the numbers quoted by the financial industry
computed as average returns (as above)?
Is the financial industry using something that
often appears better than really is?
Also, isn't this the way the highly quoted
and widely accepted historical stock performance is computed?
Joe
--
returns, how are these returns being actually computed?
The way I understand it, these numbers are
average returns. For example, let's follow 2
funds over a 5 year period.
Fund 1:
year1: 50%
2: -60%
3: 30%
4: 30%
5: -10%
average 5 year return: ((50+30+30)-(60+10))/5 = 8%
Fund 2:
years 1, 2,3,4,5: 8%
average 5 year return; 8%
The question then is: though both funds have
8% average 5 year returns, have these funds really
performed the same way? Let's suppose you invested
$10K on both funds. Some simple math shows:
fund 1 after 5 years: 9.12K
fund 2 after 5 years: 14.69K
Fund 1 lost $880 while fund 2 gained a hefty $4690
from the same $10K initially invested.
Are the numbers quoted by the financial industry
computed as average returns (as above)?
Is the financial industry using something that
often appears better than really is?
Also, isn't this the way the highly quoted
and widely accepted historical stock performance is computed?
Joe
--