Author: Geoff Considine
Published by: Seeking Alpha
Date: 14 Jun 2007
“In a recent article, I discussed why it is important to pay attention to risk measures like volatility and Beta.
“There is another way to examine the effective cost of volatility for investors: volatility drag. In financial modeling, we often look at average returns as the metric of growth rate, but there is another measure: Compounded Annual Growth Rate [CAGR], which is sometimes referred to as annualized return (Note: this terminology can be confusing because annualized return does not necessarily refer to CAGR, though it is often treated this way). The difference between the average annual return and CAGR is determined by volatility (as measured by the standard deviation in return)—and this difference is important.”
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