Calculating and comparing security returns is harder than you think: a comparison between logarithmic and simple returns

Robert Hudson, Andros Gregoriou

Research output: Contribution to journalArticle

Abstract

We analyse the relationships between return calculation methods, risk and observation periods. We show that the mean of a return set calculated using logarithmic returns is less than the mean calculated using simple returns by an amount related to the variance of the set. This implies that there is not a one-to-one relationship between mean logarithmic and mean simple returns and also that risk and return calculations are not independent as the measure of risk is part of the measure of return. Finally we draw on examples from the extant literature.to illustrate that these effects can be very important particularly when dealing with short observation periods.
Original languageEnglish
Pages (from-to)151-162
Number of pages12
JournalInternational Review of Financial Analysis
Volume38
DOIs
Publication statusPublished - 16 Oct 2014

Keywords

  • Stocks
  • Logarithmic Returns
  • Simple Returns
  • Risk
  • Return
  • Observation Periods
  • Intraday Data

Fingerprint Dive into the research topics of 'Calculating and comparing security returns is harder than you think: a comparison between logarithmic and simple returns'. Together they form a unique fingerprint.

  • Cite this