Returns - RISK & RETURN Calculation methods

A Closer Look at Varieties of RETURNS : Understanding Their Significance

RETURNS – 1 :

  • Simple Return
  • Logaritmic Return
  • Exponential Return
  • Cumulative Return
  • Expected Return

I’ve genuinely learned so much from various sources and individuals, but I’ve taken the initiative to research everything on my own. Interestingly, no matter the topic being taught or explained, even the person conveying the information often lacks a deep understanding of the subject matter. It’s as if they’re unfamiliar with the concepts themselves. This situation isn’t much different from the repetitive teaching method where information is simply copied and pasted when presenting subjects.

One example of this is the concept of RETURNS. It’s a concept that has always come across my path but in various forms. As seen with the types mentioned earlier, everyone talks about the same thing, just in different ways. In this context, I’ll provide insights into how, where, and in what manner these types of returns are utilized.

Understanding when and where these different types of returns are used is important. For example, the Simple return can be used for quick checks, while the logarithmic return is better for comparing things over different time spans. Cumulative return shows overall performance, and compound return shows how investments grow when we reinvest. Expected Return provides a forward-looking estimate that helps individuals and businesses make financially sound decisions

Here’s a simplified explanation of the differences between “Normal Return,” “Logarithmic Return,” “Cumulative Return,” “Exponential Return,” and “Expected Return” in a way that’s easy to understand:

  1. Normal Return (Simple Return): Normal return shows how much an investment’s value has changed from the beginning to the end. It’s like the basic difference between the starting and ending values. Usually, it’s shown as a percentage. But it doesn’t really pay attention to the changes that happened in between – only the start and finish matter.
  2. Logarithmic Return (Logarithmic Return): Logarithmic return looks at an investment’s price changes using a fancy math called logarithms. Instead of just ratios, it uses the actual values of the changes. This way, it takes into account all the changes that happened, like ups and downs.
  3. Cumulative Return (Cumulative Return): Cumulative return is like keeping track of all the returns you get over time. Imagine you start with $100, and each year you get some return – you keep adding those up. It’s like looking at the total change over a bunch of periods.
  4. Exponential Return (Compound Return): Exponential return is like when your money makes more money. Say you invest $100, and it grows by 10% in the first year. Now you have $110. If it grows another 10% next year, it’s not just 10% of your original $100, but 10% of $110. So it’s like your money is growing on itself.
  5. Expected Return (Expected Return): Expected return is like guessing the average return you might get. It’s based on different possibilities and their likelihoods. Investors use this to understand the balance between risk and reward.

Please note: As always, I’ll keep the explanations very straightforward. I suggest you take a look at my article on “Statistics and Data Science” regarding this topic.