The most important thing when dealing with investment returns is to bear in mind that what is measured are past returns and that it is very unlikely that the past will be ever repeated in the future.
Nevertheless, investment returns are of great interest in the modern finance world and serve many purposes...
- 'Investment returns' is a product or at least a product characteristic being sold to customers
- Investment returns can finance liabilities
- Returns are used to 'assess' investment manager skills
- Management fees are calculated based on investment returns
From a calculation point of view, it is important to keep in mind that investment returns are nothing more than growth rates of the capital invested over a certain time period expressed as a percent figure. This sounds very simple, but calculating investment returns can be tricky when dealing with actual portfolios for several reasons. The underlying issue a lot of times is that the input data follows "accounting logic", and not "calculation logic". Therefore, necessary inputs might be missing altogether or they might come in a form that cannot transformed easly. The most obvious example for this conflict is "gains and lossed" (realized and unrealized), which have a very different meaning in accounting than in an investment return context.
There are all sorts of 'returns'...
- Total Return mark I: ...
- Total Return mark II: ...
- Absolute Return: ...
- Relative Return: ...
- Guaranteed Return: ...
- ...
