#### zakenjanei

##### Dryer sheet wannabe

- Joined
- Feb 1, 2005

- Messages
- 17

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

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