Finance 2 - formulas

Formula to calculate the return

P0 =

P1 =

Steady/Continuous rate of return formula

Discrete rate of return formula

Find discrete rate of return using steady/continuous rate of return

Find steady/continuous rate of return using discrete rate of return

How to find which year our stock performed best / which year we had the biggest loss

Formula for calculating the return throughout different time periods

What to watch out for when you calculate the return throughout different time periods

Watch out if the investment starts at time 1 or time 0!

If it starts at time 1 the DO NOT include the percentage of time 1!!!

If you had to decide afterwards to invest for three periods 1-6 (e.g., from 0 to 3, 1 to 4, etc.). Which period should

you choose if you want to achieve the highest possible return?

Calculate each triple pack and compare!

0-3, 1-4, 2-5, 3-6

Remember: Multiply percentages and the -1 for each triple pack!!

What is the difference between the arithmetic average and the geometric average?

The arithmetic average represents the average of the yearly returns, whereas the geometric average represents the actual compounded annual growth rate of the investment. The geometric average is generally lower than the arithmetic average because fluctuations in returns reduce long-term growth. The geometric average is therefore more appropriate for measuring an investment’s performance over multiple periods.

Quick memory trick: Arithmetic = average yearly return. Geometric = compounded growth over time.

Geometric average formula

What happens when interest is calculated more frequently?