Stock

and index return

In discrete time, computing the gross return over two dates (t) and (t-1) is an easy task. It is simply given by the following formula: where Pt stands for the ending value, while Pt-1 stands for the beginning value. The same formula is used for securities as well as indexes. The formula is very simplistic, however the resulting return may be confusing when the period under consideration is different from one year, and especially if the length of the time period differs between securities which you wish to compare. Indeed the reference for any investment is the yearly return. It is thus necessary to compute the CAGR: Compound Annual Growth Rate. The CAGR is the year-on-year growth rate of an investment over a specified period of time. To get the CAGR from the gross return, one has to compute the nth root of the gross return where n stands for the number of years in the period considered to get the grow rate. Note that the number of years doesnt have to be a round number. Moreover, the bankers usually consider that there are 360 days in a year.