Rolling Returns

Definition

Rolling Returns are the annualized average returns of an investment over a certain period of time. They are computed for a specific interval by shifting the period forward or backward in time in a continuous manner. Rolling Returns provide a more comprehensive view of an investment’s performance by demonstrating the returns across different intervals, helping to highlight an investment’s volatility and consistency.

Phonetic

The phonetics of the keyword “Rolling Returns” would be:Rolling: /ˈroʊ.lɪŋ/Returns: /rɪˈtɜrnz/

Key Takeaways

Here are the three main takeaways about Rolling Returns:

Period Analysis: Rolling returns are often used to analyze the performance of an investment over a certain period. Unlike point-to-point returns, rolling returns give a better perspective on the returns that an investor is likely to get from an investment.
Risk Assessment: With rolling returns, investors have a better tool for assessing the risk associated with their investments. The measure provides a broader view of the performance throughout various cycles of markets, interest rates, and economic conditions over the investment horizon.
Performance Comparison: Rolling returns also provide an effective way to compare investment performances. When comparing various funds for investment, rolling returns can provide details beyond just the returns and help investors make a more informed choice.

Importance

Rolling returns are a vital concept in business and finance as they provide a comprehensive view of a fund’s performance over different time frames. Instead of focusing on a specific point-to-point return, rolling returns offer insights into the performance consistency and volatility of investments. It calculates the return over specific periods using a series of overlapping cycles rather than using a set beginning or end point, thereby not being dependent on a particular market phase. This helps investors with better analysis, decision making, and risk assessment by providing more detailed information about an investment’s historical returns, thereby reducing the chances of making decisions based on short-term or seasonal trends.

Explanation

Rolling returns are primarily used for analyzing the historical performance of investments, such as stocks, bonds, mutual funds, or portfolios over a specific period. Unlike ‘point-to-point’ returns which only consider the start and end points of a defined investment period, rolling returns offer a broader view by considering multiple sub-period returns within the total investment timeframe. This offers investors a more comprehensive understanding of an investment’s returns variance, trends, stability, and overall risk. The aim of using rolling returns is to understand how an investment performed not just at one specific point in time, but throughout different market conditions during the full investment period. This can provide a view of how consistently the investment has performed and indicate the historical probability of achieving certain returns. By reducing the reliance on a single financial period and averaging the performance over several periods, investors have a more realistic assessment of an investment’s potential gains or risks. This can increase the confidence and accuracy in future investment decision-making.

Examples

1. Mutual Funds: The rolling return of a mutual fund, for example, would refer to the return an investor would have received if they had invested into the fund at any given point in time during a certain period. Say, you’re trying to calculate the five-year rolling returns of a mutual fund – the calculation will be done for a series of overlapping periods. If the span under study is January 2000 to January 2020 (20 Years), you will actually make calculations for 16 different five-year periods, i.e., you are calculating rolling returns for every possible five-year investment within that 20 years window.2. Stocks: Take the stock of Apple Inc, for instance. If an investor wants to calculate 12-month rolling returns in a 5-year period, they will calculate returns for each 12-month period in those 5 years. For example, from January 2018 to January 2019, then February 2018 to February 2019, March 2018 to March 2019, and so on. This gives a holistic overview of how the stock has performed irrespective of market conditions and anomalies that might have happened at specific times.3. Bonds: Consider a 10-year government bond purchased in 2005. To calculate its rolling returns for 5 years, we would consider returns from 2005 to 2010, then from 2006 to 2011, 2007 to 2012, and up to the present. This allows us to see how the bond’s return has changed over various periods and thereby understand the changes in interest rates and government policy over time.

Frequently Asked Questions(FAQ)

What are Rolling Returns in finance and business terminology?

Rolling Returns, also known as rolling period returns, are annualized average returns of an investment for a certain period ending each day, month, or year. It simply means the returns calculated continuously over specific intervals.

Why are Rolling Returns important?

Rolling Returns are vital as they provide a broader perspective of an investment’s performance. They furnish comprehensive insights into the returns across multiple time frames, thus enabling an accurate assessment of the investment’s consistency and reliability.

How are Rolling Returns calculated?

Rolling Returns are calculated by shifting the start date of the period forwards or backwards in time. The calculation involves determining the annualized return over the chosen period on a rolling basis until the available data is exhausted.

What is the main advantage of using Rolling Returns?

The main advantage of using Rolling Returns is to smooth out the effects of peaks and troughs in an investment’s performance data, thereby providing a more accurate indication of an investment’s ongoing return potential.

How do Rolling Returns differ from Annual Returns?

The main difference between the two is about the time frames for calculating these returns. While Annual Returns are based on one specific year, Rolling Returns are calculated over specific periods that ‘roll over’ year after year.

Can Rolling Returns be negative?

Yes, Rolling Returns can be negative if the overall performance of an investment is poor over the specified period.

What does it indicate if the Rolling Returns of an investment are fluctuating frequently?

If the Rolling Returns of an investment are fluctuating frequently, it might indicate high volatility and unpredictability of the investment, signaling a potential risk to the investor.

How often should one check the Rolling Returns of an investment?

While it depends on individual investment strategies, it’s generally a good idea to check Rolling Returns periodically so as to comprehensively assess the performance consistency of an investment.

Do Rolling Returns apply to all types of investments?

Yes, Rolling Returns can be used to evaluate the returns from various types of investments, such as mutual funds, stocks, bonds, or index funds.

: Can Rolling Returns be used to predict future returns?

: No, Rolling Returns aren’t predictive. They provide historical insights into an investment’s performance but they don’t forecast the investment’s future returns.

Related Finance Terms

Compounded Annual Growth Rate (CAGR)
Volatility
Investment Performance
Inflation Rate
Asset Allocation

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