Course Name: Short Selling in Trading, Section No: 4, Unit No: 1, Unit type: Notebook
I cannot get the point, why cumulate daily percentage change will be a measure about return? If the end of the stock price/ the first of stock price can represent the change of stock price and also represent the percentage of stock return? Thanks.
Hi Zhao Xu,
We use percentage change as a measure of return as it makes the return comparable for different stocks.
For example, Stock A is trading at $100 and closed at $110, gives a return of $10. Stock B is trading at $10 and closed at $13, gives a return of $3. The return for stock A is more than that of stock B. But if you invest an equal amount in both stock A and stock B, suppose $100. Stock A will give a return of $10, whereas stock B will give a return of $30. Hence stock B has higher returns.
But only knowing the change in the purchase amount is not sufficient. What if stock B, before closing at $13, had fallen to $7? This can result in hitting the stop loss. Hence, knowing the path of the return is very important. Thus we calculate the daily returns instead of comparing the last and the first price.
Hope this helps.