Why do we use returns instead of prices?

Most financial studies involve returns, instead of prices, of assets. First, for average investors, return of an asset is a complete and scale-free summary of the investment opportunity. Second, return series are easier to handle than price series because the former have more attractive statistical properties.

Why are asset returns used for measuring performance instead of asset prices?

A return is a percentage defined as the change of price expressed as a fraction of the initial price. It turns out that asset returns exhibit more attractive statistical properties than asset prices themselves. Therefore it also makes more statistical sense to analyze return data rather than price series.

What is time series return?

A similar measure of the relative change in the variable S over time t is the simple return R(t), defined as: R(t) might seem a more intuitive description of relative change, but for a variety of reasons it is much easier to use r(t) in stochastic time series modeling.

What is time series in financial Modelling?

Financial time series, in general, exhibit average behaviour at “long” time scales and stochastic behaviour at ‘short” time scales. As in statistical physics, the two have to be modelled using different approaches — deterministic for trends and probabilistic for fluctuations about the trend.

Why do we use log returns in finance?

Log return is used for statistical evaluation such MSPE and out-of-sample R-square. Simple return is used for calculating economic value such as CER gain and Sharpe ratio. This is because Log return and simple return have the additivity property for, respectively, time-series and cross-section perspectives.

What does return on assets tell you?

Return on assets, or ROA, measures how much money a company earns by putting its assets to use. In other words, ROA is an indicator of how efficient or profitable a company is relative to its assets or the resources it owns or controls.

Is ROA a better performance measurement than Roe?

ROA = Net Profit/Average Total Assets. Higher ROE does not impart impressive performance about the company. ROA is a better measure to determine the financial performance of a company. Higher ROE along with higher ROA and manageable debt is producing decent profits.

What is the concept of return?

A return, also known as a financial return, in its simplest terms, is the money made or lost on an investment over some period of time. A return can also be expressed as a percentage derived from the ratio of profit to investment.

What is meant by financial rate of return?

A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.