Module 9Returns & VolatilityLesson 1 of 822 min
Simple vs Log Returns
Definitions, when to use which, and implementation pitfalls.
Simple return
R = P_t / P_{t-1} - 1
Log return
r = ln(P_t / P_{t-1})
Why log?
Additivity over time; natural for continuous compounding and GBM.
Pitfalls
- Prices must be > 0
- Corporate actions: adjust prices first in real data
- Mixing simple and log inconsistently
Challenge
Convert a log return series back to a price path from P0=100.
Tips
- Log rets add
- Simple rets compound multiplicatively
- Keep units clear
Try it live
Simple vs Log ReturnsRust 2021
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Output
Press Run to compile and execute.