Calculating returns
The total annual return on any financial asset can be divided into two components: the capital gain
from the change in the asset price P, and a yield component Y, that reflects the cash-flow return on
an investment. The total nominal return R for asset i in country j at time t is calculated as:
Total return: Ri,j,t =
Pi,j,t - Pi,j,t-1
Pi,j,t-1
+ Yi,j,t
. (1)
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Because of wide differences in inflation across time and countries, it is helpful to compare
returns in real terms. Let pj,t = (CPIi,j,t - CPIi,j,t-1)/CPIi,j,t-1 be the realized consumer price index
(CPI) inflation rate in a given country j and year t. We calculate inflation-adjusted real returns r for
each asset class as
Real return: ri,j,t = (1 + Ri,j,t)/(1 + pj,t) - 1 . (2)
These returns will be summarized in period average form, by country, or for all countries.4
Investors must be compensated for risk to invest in risky assets. A measure of this “excess
return” can be calculated by comparing the real total return on the risky asset with the return on a
risk-free benchmark—in our case, the government bill rate, rbill,j,t
. We therefore calculate the excess
return ER for the risky asset i in country j as
Excess return: ERi,j,t = ri,j,t - rbill,j,t
Het is mij al heel lang duidelijk, dat izdp dit volledig begrijpt en daarom ook onderschrijft......