Measuring return correctly

Sophomore · enrolled learners

This lesson opens with The gap that could not be measured at market scale.

What happened

Dichev published in the American Economic Review in 2007, arguing that investor returns and security returns differ because of the timing and magnitude of investor capital flows, and reporting that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets. The gap was put at about 1.3 percentage points a year for NYSE and AMEX over 1926 to 2002 and about 1.5 points internationally. Keswani and Stolin re-examined the evidence in Finance Research Letters in 2008 and found the NYSE and AMEX gap was negative across the last two thirds of that period, that the international results moved with database coverage changes, and that the UK figure reversed from 1.1 to negative 1.3 depending on the data source. Their stated conclusion was that the findings are not robust.

The decision point

Read what the dispute is actually about. Neither side disagrees that the two measures differ, or about how to compute them. They disagree about reconstructing an entire market's aggregate cash flows from incomplete historical data. You have no such problem. Your deposit and withdrawal dates are known exactly, so the calculation that a discipline cannot settle at market scale is arithmetic at yours, and almost nobody performs it.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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