Personal Finance Concepts

Investment Return and Volatility Explained

CAGR is used for measuring investment return and standard deviation for volatility. Investment return is often expressed as annualized return or CAGR (Compound Annual Growth Rate). Let us explain the concept using an example in which the annual performance of an investment is different each year. A simple arithmetic average of the three annual returns …

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Effect of Taxes vs. Inflation on Asset Growth

While the effect of taxes on investment return occurs when a sale transaction happens, the effect of inflation is continuous and is modeled as a discount factor. Consider a scenario in which you invest $100 in a financial instrument that promises a 10% annual return on a compounded basis. You sell your investment after holding …

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What Does Inflation-Adjusted Means?

It is fundamental to financial engineering that we understand the interplay between nominal and real terms due to inflation and its effect on such things as accounting for future expenses, asset growth or long-term investments. The math behind adjusting for inflation is simple, but the underlying concept can quickly become confusing. Inflation represents increase in …

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