Home Forums Life How to average, annualize stochastic returns across scenarios?

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    indAct
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      Is there a proper way to average and annualize stochastic returns across scenarios? Let’s say that returns are quarterly and presented as 1+qtrlyRet. I’ve come up with at least three ways that one might arrive at the average annual return across the scenarios:

      1) accumulate $1, invested at time 0, to the end of the projection; take arithmetic average; annualize (^1/projYrs-1)
      2) accumulate $1, invested at time 0, to the end of the projection; annualize (^1/projYrs-1); take arithmetic average
      3) take arithmetic average quarterly return across all projQs and scenarios; annualize(^4-1)

      See attached image for a quick numerical example… average annual ret across scenarios using method one is in H11; method 2 in H14; method 3 in H17

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