Choosing the right return measure for the situation, and why point-to-point comparisons can mislead.
There is no single return figure that fits every situation - the right measure depends on the holding period and the pattern of cash flows involved.
This chapter is often tested through practical "which measure applies here" questions rather than pure definitions.
Absolute Return = ((End Value - Start Value) / Start Value) x 100, best suited for periods under a year since it does not annualise the figure.
CAGR = (End / Start)^(1/n) - 1, the right measure for a lump-sum investment held over more than a year, since it smooths the return into an annualised figure.
XIRR is the right measure for SIPs and any irregular cash flows, because it correctly accounts for money entering the investment at different dates with different holding periods - using CAGR on a running SIP's final value would be misleading.
Rolling returns are calculated over many overlapping periods (for example, every possible 3-year period within a 10-year dataset) rather than a single fixed start and end date.
This makes them more reliable than a simple point-to-point return, which can look unusually good or bad purely because of which specific start/end dates were chosen.
A return figure only means something in context - it should always be compared against a disclosed benchmark (calculated on a total-return basis, which includes dividends/interest reinvested) and against category peers.
A fund returning 12% sounds good in isolation, but means something very different if its benchmark returned 8% versus 16% over the same period.
Memory hook
Lump sum -> CAGR. SIP -> XIRR. Always compare against a benchmark, never in isolation.
Independent study aid by Ramaniya, based on the syllabus of the National Institute of Securities Markets (NISM) - not an official NISM publication.
