Two formulas:
Annualized Expected Return = (Gross Spread/ Investment)*(360/ Inv. Period)
versus.
Annual Return = (ending value/beginning value)^(1/# of years) - 1
Which one is the appropriate one to use when comparing returns across asset classes? I understand that the top one does not incorporate compounding, while the bottom one does.
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http://itswhatyoukeep.hubpages.com/hub/Geometric-vs-Arithmetic-Rate-of-…
[quote=eriginal]http://itswhatyoukeep.hubpages.com/hub/Geometric-vs-Arithmetic-Rate-of-…]
Nice link..however, i was referring to how pms make investment decisions. The way i see it, the first formula would be used to compare possible investments by setting a one year investment horizon. For example, investment a yields a certain return in 6 months, where as investment B yields another return in 18 months....using the first formula i would know which investment is better and be able to gauge it against say one-year t-bonds....The second formula however, gives me a the "actual" average annualized return on a particular investment.
To rephrase, why utilize the first formula in the first place, when you can use the second to essentially get the same information?
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