I’m conducting a software certification for a client, and reviewing their documentation, which includes a statement that begins, “If you have a cumulative return…” However, they fail to define this term. And so, I will offer my thoughts. But, I decided to check out how others refer to it:
- Investopedia: The aggregate amount that an investment has gained or lost over time, independent of the period of time involved.
- Russell: A compounded rate of return covering more than one year.
- eHow.com: how much money [investors] are making on the principal amount they invested
- Center for Research in Security Prices (CRSP): a compounded return from a fixed starting point
I don’t particularly like any of these definitions.
- “Aggregate amount”? We’re talking percentages!
- Why limit to “more than one year”? Can’t we have a six month cumulative return?
- “How much money”? We’re talking returns!
- Sounds very technical (“from a fixed starting point”; as opposed to a nonfixed starting point?)
“Cumulative” has the same root as “accumulate.” If we turn to Dictionary.com we find the following for “cumulative”:
- Increasing or growing by accumulation or successive additions: the cumulative effect of one rejection after another.
- Formed by or resulting from accumulation or the addition of successive parts or elements.
We generally contrast cumulative and annualized returns. And so, I would say that “a cumulative return is the nonannualized return for any given period.” Of course, we don’t annualize for periods less than a year, but that doesn’t prohibit us from having a six month cumulative return, does it?
Thoughts? Chime in!