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Investment markets operate on relative gain, not absolute gain. E.g.: if you invest in a stock and it gains $5, this would be a great return for a $1 stock but
by jpeterson 8y ago
Investment markets operate on relative gain, not absolute gain. E.g.: if you invest in a stock and it gains $5, this would be a great return for a $1 stock but a poor one for a $1000 stock, so the absolute gain doesn't mean anything on its own. A 5% return always means that you've gained 5% on your investment.
- ak39 8y agoWould it be the same (valid) with percentage returns?
- deleted 8y ago[deleted]
- goodside 8y agoLess so. Log-normal returns are better because they have the property that a summation of log-normal returns over contiguous intervals is equal to the log-normal returns of the combined interval. In other words: Losing 5% and then gaining 5% doesn’t put you back at exactly 100%, and log-normal fixes that.
- theothermkn 8y agoIn the extreme, two successive trades, where the first gains 110% and the second loses 100%, “average” out to a 5% return. However, you don’t want to make that pair of trades.
- ak39 8y agoAh, that makes sense. Many thanks.