Rolling returns are a way of measuring the performance of an investment over a specific period of time. Instead of just looking at the return from the beginning to the end of the period, rolling returns calculate the average return for every possible starting point within that period. This gives you an exact picture of how the investment performed over time.
For better understanding Imagine you are driving down a long road. You want to know your average speed over the entire trip. But instead of calculating your speed for the entire trip, you decide to calculate your average speed for every mile of the trip. This is similar to how rolling returns are calculated.
For example, let’s say you want to know the rolling 5-year return of a stock market index. This means that you would calculate the average return of the index for every possible 5-year period within the past 10 years. So, you would calculate the return from 2003 to 2007, then from 2004 to 2008, and so on. This would give you a series of 5-year returns, which you could then average to get an overall sense of how the index performed over the past 10 years.
How to Calculate Rolling Returns
To calculate rolling returns, you will need a historical dataset of prices for the asset you are interested in. Once you have this data, you can use the following formula:
Rolling Return (n) = (Ending Price – Beginning Price) / Beginning Price
n is the window size (e.g., 1 year, 3 years, 5 years)
Ending Price is the price of the asset at the end of the window
Beginning Price is the price of the asset at the beginning of the window
For example, lets say you want to calculate the 2-year rolling return for a fund that has the following prices over the past 10 years:
|Date||NAV||Rolling Returns 2- Years period|
Difference between Rolling Returns and Annual Returns
Rolling returns are annualized average returns for a period, ending with the listed year.
Annual return is a measure of the investment’s performance over a one-year period. It represents the percentage increase or decrease in the value of an investment over the course of a calendar year.
|Aspect||Rolling Returns||Annual Returns|
|Calculation Method||Cumulative returns over a specified rolling period||Returns calculated over a calendar year|
|Time Frame||Periods overlap (e.g., 2 years rolling, moving monthly)||Fixed calendar year (January to December)|
|Sensitivity to Timing||Captures variations over different time intervals||Aggregates performance for an entire calendar year|
|Flexibility||Can be customized to various rolling periods||Fixed to a predefined calendar year|
|Interpretation||Provides a dynamic view of performance trends||Represents a snapshot of performance for a specific year|
|Smoothing Effect||May smooth out short-term fluctuations in returns||Can be sensitive to the timing of market events|
|Example Use Cases||Useful for identifying trends, cycles, and performance over various market conditions||Commonly used for year-to-year performance comparisons|
Rolling returns offer a more dynamic and flexible view of an investment’s performance over different time frames, allowing for a detailed analysis of trends and cycles. On the other hand, annual returns provide a straightforward, fixed-period snapshot, making them a common metric for comparing year-to-year performance.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.