Friday, March 16, 2012

Simple Question: What is a Cumulative Return?

I'm conducting a software certification for a client, and reviewing their documentation, which includes a statement that begins, "If you have a cumulative return..." However, they fail to define this term. And so, I will offer my thoughts. But, I decided to check out how others refer to it:
  • Investopedia: The aggregate amount that an investment has gained or lost over time, independent of the period of time involved.
  • Russell: A compounded rate of return covering more than one year.
  • how much money [investors] are making on the principal amount they invested
  • Center for Research in Security Prices (CRSP): a compounded return from a fixed starting point
I don't particularly like any of these definitions.
  • "Aggregate amount"? We're talking percentages!
  • Why limit to "more than one year"? Can't we have a six month cumulative return?
  • "How much money"? We're talking returns!
  • Sounds very technical ("from a fixed starting point"; as opposed to a nonfixed starting point?)
"Cumulative" has the same root as "accumulate." If we turn to we find the following for "cumulative":
  1. Increasing or growing by accumulation or successive additions: the cumulative effect of one rejection after another.
  2. Formed by or resulting from accumulation or the addition of successive parts or elements.
We generally contrast cumulative and annualized returns. And so, I would say that "a cumulative return is the nonannualized return for any given period." Of course, we don't annualize for periods less than a year, but that doesn't prohibit us from having a six month cumulative return, does it?

Thoughts? Chime in!

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.