An Overview of Capital Market History

Using historical data we want to get an idea about the relationship between risk and return. In particular that higher risk affords higher return. In later chapters we will see that this statement is too simplistic, and in fact only higher systematic risk affords higher returns.

To calculate returns we need to first calculate our dollar gain or loss, and then divide this by the cost of our investment.

• Arithmetic Average:

$$\bar{r}_{aa} = \frac{r_1 + r_2 + .... + r_n}{n}$$

• Geometric Average:

$$\bar{r}_{ga} = (r_1 r_2 .... r_n)^{(1/n)}$$

See this Blackrock document.

See the this link.