The return and risks that investors have experienced in the past, which is an important

step in estimating future returns and risks

A knowledge of historical risk–return relationships is a necessary first step for investors in
making investment decisions for the future. Therefore, it is very important for investors to
understand what has occurred in the past. Analyzing historical data can provide insight into how
a security or market has reacted to a variety of different variables, from regular economic cycles
to sudden, exogenous world events.
A. Historical Return
Historical returns are often associated with the past performance of a security or
index, such as the S&P 500. Analysts review historical return data when trying to predict
future returns or to estimate how a security might react to a particular situation, such as a
drop in consumer spending. Historical returns can also be useful when estimating where
future points of data may fall in terms of standard deviations. A historical return for a
stock index such as the S&P 500 is typically measured from the open on January 1st to
the market's close on December 31st to provide the annual return.

How to Calculate Historical Returns:

Calculating or measuring the historical return of an asset or investment is
relatively straightforward. Subtract the most recent price from the oldest price in the data
set and divide the result by the oldest price. We can move the decimal two places to the
right to convert the result into a percentage.
For example, to calculate the return of the S&P 500 for 2021 with the following data:

2,506 = the S&P 500 closing price on December 31, 2020

3,230 = the S&P 500 closing price on December 31, 2021
3,230 - 2,506 = 724
724/2,506 = .288 or 29%*
*The returns were rounded to the nearest number.1

The process can be repeated if an investor wanted to calculate the return for each month,
year, or any period. The individual monthly or yearly returns can be compiled to create a
historical return data set. From there, investors and analysts can analyze the numbers to
determine if there are any trends or similarities between one period or another.

B. Historical Risk
Investors would much rather talk about the returns their funds generated than the
risks they took to achieve those returns or the losses they've incurred. Take the large-cap
Cambiar Opportunity Fund for example.
- This fairly concentrated fund landed in the top 10% of its category in 2001-2004,
- Then reversed course in 2007 and 2008, landing in the category's worst 5% and 25%
respectively,
- Returning to its winning ways in 2009 and 2010.
 Tremendous gains are won only through tremendous risk taking, which often means
many ups and downs in short-term returns. That's called volatility. While no single risk
measure can predict with 100% accuracy how volatile a fund will be in the future, studies
have shown that past risk is a pretty good indicator of future risk. In other words, if a
fund has been volatile in the past, it's likely to be volatile in the future.

REFERENCE:
Kenton, Will. (2021). Historical Returns. Investopedia