Financial contract 2 - Average annual return computed in two ways.
3 views (last 30 days)
First i calculate the the average annual return for the Dow jones industrial average over the last 22 years by using the first and last value.
To continue writing my code i also need to calculate the average return between two days separated by one year for every day over the last 22 years.
Shouldnt these two numbers be the same?
fid = fopen( 'DJ30Daily.csv', 'r' );
str = fread( fid, '*char' );
sts = fclose( fid );
str( str == '"' ) = ;
str( str == ',' ) = '.';
cac = textscan( str, '%f' );
DJ30Daily = cell2mat(cac);
DJ30Daily = DJ30Daily(121:5668);
AverageAnnualReturnPercentLast22y = nthroot(P, 22)
AverageReturnBetweenDaysSepartedBy1yearOverTheLast 22years =
Javier on 10 Sep 2012
I think you are confuse. Lets put some numbers in return calculation.
Price Annual Return
Year 1 1000
Year 2 900 -0.1
Year 3 950 0.056
Year 4 1000 0.0526
Year 5 1050 0.05
A 5 years holding investment says that you win 5%. Then, if you compound annually the return, you will get the same return. (1-0.1)*(1.056)*(1.0526)*(1.05)-1 = 5%
Just remember that Arithmetic return, geometric return and harmonic return estimations, will give you different results: Arith > Geometric > Harmonic (google it for examples).
Hope it helps. Best regards.