If you have investment performance for a period of 7 days and want to annualize it, is it best practice to compound or not?
IE r * 365/7 vs. 1+r^365/7-1
I’ve sent it done both ways and never have been clear why the person did it one way or the other
this is not neccessarily for performance evaluation for the L# matieral because I know annualizing rates for a period less than a year is discouraged, but more for every day use
It depends on whether you want a nominal rate or an effective rate.
Where did you find this in the CFAI text? Do you have an example for each of the two methods you’re suggesting above? I feel like that might be something that’s helpful to know. Thanks!
say for example you are a short term trader and earn 2% in a position that you held for one week. the yearly equivalent return is what im after. Compounding implies that you will earn the same return every week (but i guess multiplying does too, so i’m not sure which I want
not really CFAI related, but in peformance measurement they reccomend not annualizing sub-annual period returns at all so that sort of applies
and in one of the examples in the text (could have been in the fixed income section- I cant remember) the example just multiplies a monthly rate x 12 to get the yearly return which I thought was odd
so basically im just waiting for magician to tell me what to do
In that scenario, you’d want to compound it: effective rate.
That’s easy: send all of your money to me; I’ll figure out your return and send it back to you . . . periodically.
i probably do owe you about all of my money after all the help youve given me