[R-SIG-Finance] returns convention

[Eric Zivot]

Log returns, or continuously compounded returns, are typically used when
doing statistical analysis of returns because of the nice additivity
properties of multiperiod returns and the fact that they are defined between
-00 and +00. However, you have to be a bit careful when dealing with
portfolios since the log portfolio return is not a weighted average of the
log returns on the individual stocks. I actually have not seen a good
discussion of the implication of using log returns for portfolio analysis.
Does someone have a good reference? 

-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of Jeff Ryan
Sent: Monday, October 08, 2007 7:29 AM
To: paul sorenson
Cc: r-finance
Subject: Re: [R-SIG-Finance] returns convention

It seems to be common within academic literature - econometric and finance,
though I'd not go so far as to rely on one definition across a range of
applications.  Probably should/could be, but unlikely to ever happen.  Even
my quantmod package isn't entirely consistent - as some functions are log
diff and others simple percent changes - depending on use. Though I *think*
it is documented where each is used.

And as far as I can tell, my trading accounts don't change by log
differences : )

Jeff

On 10/8/07, paul sorenson <sf at metrak.com> wrote:
> Is it usually assumed that references to "returns" are calculated as 
> diff(log(prices))?  Compared with say the simple fractional change 
> from one price to the next?
>
> For example, in PerformanceAnalytics I notice that the default value 
> of CalculateReturns is diff(log(prices)).
>
> I guess it probably doesn't matter much either way for small changes, 
> I just wanted to know if there was some common convention when I see 
> an R function that expects a returns vector.
>
> cheers
>
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