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Conference nyoss1::market_investing

Title:Market Investing
Moderator:2155::michaud
Created:Thu Jan 23 1992
Last Modified:Thu Jun 05 1997
Last Successful Update:Fri Jun 06 1997
Number of topics:1060
Total number of notes:10477

354.0. "How to determine avg annual return??" by KYOA::BOYLE (Dirty Jobs Done Dirt Cheap) Wed Jan 13 1993 18:30

    I am using QUICKEN for Windows.  I cannot figure out how "Average
    Annual Return" is calculated.  It has a time component because when I
    change purchase or sale dates, the yield changes.
    
    As an example:
    
    6/1 buy stock for $1413
    8/28 sell all stock for $1413
    12/1 buy stock for $1466
    12/5 sell stock for $1711
    
    Avg annual return is listed as 73.6%
    
    Does anyone know how this is determined? 
    
    Thanks in advance,
    
    
    Jack Boyle
T.RTitleUserPersonal
Name		DateLines
354.1my guessNECSC::BIELSKIAm I a curmudgeon yet?Wed Jan 13 1993 20:2117
    Average annual return for any investment over any time period should be:
    
    	% gain or loss over the investment period
        __________________________________________    X  365
                nr of days invested
    
    i.e., calculate the % gain or loss for one day, then multiply for a
    full year.
    
    For your example, there would be no gain from 6/1 to 8/28, and a 
    gain of $245 from 12/1 to 12/5.  The two investment periods total 
    around 90 days, so average annual return works out to be about
    
    		   245/1466
    		____________   X  365   = 68%
    		    90
354.21+NOVA::FINNERTYThu Jan 14 1993 12:365
    
    it should probably also factor in the effect of compounding.
    
       /jim
354.3how to calculate avg annual return with compoundingNETCAD::SIEGELThe revolution wil not be televisedThu Jan 18 1996 15:2828
re:                      <<< Note 354.2 by NOVA::FINNERTY >>>
>                                    -< 1+ >-
>
>    it should probably also factor in the effect of compounding.

I am wondering about this.  Say, for example, you buy $1000 of stock.  The
stock goes up each year for 5 years.  After 5 years, the stock is up 50%
(it's value would be $1500).  What is the average annual return?

Let x = average annual return (for example, 3% = 0.03)

after 1 year:  1000 * (1+x)
after 2 years: 1000 * (1+x) * (1+x)
after 3 years: 1000 * (1+x) * (1+x) * (1+x)
after 4 years: 1000 * (1+x) * (1+x) * (1+x) * (1+x)
after 5 years: 1000 * (1+x) * (1+x) * (1+x) * (1+x) * (1+x)

so after 5 years, 1000 * (1+x)^5 = 1500

Solving for x, we get x = 8.4472%  This is *not* simply 50% divided by 5
years, which would be 10% a year.  Due to compunding, the average annual
return is 8.4472%

Is this correct?

thanks,

adam