Average Returns

Learn more about Average Returns

The average return of a trading strategy or portfolio is a statistical measure that indicates the average return one can expect to achieve over a given period of time, typically measured in percentage. This measure is important for investors as it enables them to determine whether a trading strategy or portfolio has generated a positive or negative return over time.

It is also important to note that past average returns are not a guarantee of future performance. Past returns are not necessarily indicative of future results, and past performance does not guarantee future success. Therefore, it is important for investors to consider a variety of factors, such as market conditions, risk, and diversification, when evaluating a trading strategy or portfolio.

Arithmetic and logarithmic returns are two ways to measure the return on an investment or portfolio. The choice between the two depends on how one wishes to interpret the returns.

• The arithmetic return is the simplest and most common measure. It is calculated by taking the difference between the purchase price and the sale price of an investment and dividing it by the purchase price.

$$\text{Arithmetic Returns} = \frac{1}{N} \sum _{t=0} ^{N} {\frac{return_{t+1} - return_{t}}{return_{t}}}$$

• The logarithmic return is a more complex measure that takes into account time and the continuous growth of investments. It is calculated by taking the natural logarithm of the ratio between the final value and the initial value of the investment.

$$\text{Logarithmic Returns} = \frac{1}{N} \sum _{t=0} ^{N} { \ln{ \bigg( \frac{return_{t+1}}{return_{t}} \bigg) } }$$

More info : Investopedia

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