IDEAS home Printed from https://ideas.repec.org/p/hhs/gunwpe/0767.html
   My bibliography  Save this paper

Compound Returns

Author

Listed:
  • Farago, Adam

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Hjalmarsson, Erik

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

We provide a theoretical basis for understanding the properties of compound re-turns. At long horizons, multiplicative compounding induces extreme positive skewness into individual stock returns, an effect primarily driven by single-period volatility. As a consequence, most individual stocks perform very poorly. However, holding just a few stocks (instead of a single one) greatly improves the long-run prospects of an investment strategy, indicating that missing out on the “lucky few” winner stocks is not a great concern. We show analytically how this somewhat counterintuitive result arises from an interaction between compounding, diversification, and rebalancing that has seemingly not been previously noted.

Suggested Citation

  • Farago, Adam & Hjalmarsson, Erik, 2019. "Compound Returns," Working Papers in Economics 767, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0767
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/2077/60415
    File Function: Full text
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Compound returns; Diversification; Long-run returns; Skewness;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:gunwpe:0767. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jessica Oscarsson (email available below). General contact details of provider: https://edirc.repec.org/data/naiguse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.