Returns - RISK & RETURN Calculation methods

Picking the Best Investment Returns: How and When to Use Them

RETURNS – 2 :

Understanding the world of investment returns can sometimes feel like navigating a maze of financial jargon.

These terms might sound complex, but they hold the keys to unlocking the performance and potential of your investments. Imagine having a toolbox filled with different tools, each designed for a specific task. In a similar manner, each variety of return serves a unique purpose in the realm of finance. In this blog, I’ll dive into the world of investment returns, comparing how, when, and where these varieties are used to shed light on their strengths and applications in different contexts

WHENWHERE
Simple ReturnNormal return is often used for quick assessments of investment performance over short periodsIt’s suitable for initial evaluations, comparing simple changes in value, and understanding short-term gains or losses
Logarithmic ReturnLogarithmic return is utilized when accuracy is essential, especially for assessing investment performance over various time framesIt’s beneficial for comparing investments with different durations, analyzing volatility, and evaluating long-term trends
Cumulative ReturnCumulative return is valuable for evaluating overall performance and growth of investments over extended periodsIt’s used to track the total impact of an investment’s value changes, visualize growth trajectories, and assess long-term profitability
Exponential ReturnIt’s used to track the total impact of an investment’s value changes, visualize growth trajectories, and assessing long-term profitabilityIt’s applicable to scenarios where returns are reinvested, such as retirement planning, compound interest calculations, and assessing long-term wealth accumulation
Expected ReturnExpected return is employed when making informed investment decisions based on estimated average returnsIt’s crucial for comparing investment options, evaluating risk and potential rewards, and forming realistic expectations for future gains
Table by YigitBCesur

Understanding the distinctions between these types of return helps in making appropriate choices depending on the investment’s nature, time horizon, and objectives:

  • If you need a quick overview of short-term performance, Normal Return is suitable.
  • For accurate comparisons over various time frames, Logarithmic Return is recommended.
  • To evaluate the total impact of investment changes over time, Cumulative Return is relevant.
  • When analyzing compounded growth through reinvestment, Exponential Return is necessary.
  • For making informed investment decisions based on average returns, Expected Return is indispensable.

By grasping the appropriate usage of each type of return, individuals and investors can make better-informed decisions, optimize investment strategies, and align their choices with their financial goals