Chapter 1 Return Calculations

Updated: May 21, 2021

In this chapter we cover asset return calculations with an emphasis on equity returns. It is important to understand the different ways in which asset returns are calculated because most of the models presented in the book are for asset returns. Simple returns are most commonly used for money and portfolio calculations in practice. However, simple returns have some undesirable properties that make mathematical and statistical modeling difficult. Continuously compounded returns, in contrast, have nicer properties that make mathematical and statistical modeling easier.

This chapter is organized as follows. Section 1.1 covers basic time value of money calculations. Section 1.2 covers asset return calculations, including both simple and continuously compounded returns. Section 1.4 illustrates asset return calculations using R. This chapter uses the following R packages: IntroCompFinR, PerformanceAnalytics, quantmod, xts, and zoo. Make sure these packages are installed and loaded before replicating the chapter examples.