For example, if you lose 10 percent of your capital one period, you will need
to make 11.1 percent the next just to break even, which would make the constant
period return zero, but the average period return to 0.55 percent [( 10 11.1) /
2]. The larger the price swings, the greater the differences between the constant
period return and the average period return. For example, if you first lose 50 per-
cent one period and gain 100 percent the next, to get back to the break-even point,
the constant period return will still be zero, but the average period return will be
25 percent [(-50 100) / 2].
Furthermore, a constant monthly growth rate of 0.9588 percent would result
in a 12.13 percent growth rate for any 12-month period. But with a varying peri-
od return, a large return one month will influence the rolling 12-month return for
the next 12 rolling periods, which in turn will make the average 12-month rolling
return look higher than the average compounded yearly return. The larger, faster,
and more frequent the swings in the equity, the larger the average 12-month rolling
return will be, compared to the average compounded yearly return.
In this case, we have one exceptionally fast period of equity growth during
1999, one steep drawdown in 2001, followed by another fast run up (not ending in
a new equity high), and yet another fast decline. Consequently, a 12-month rolling
return much larger than the average annual return is a good indication that there
have been large swings in the equity curve and that the final result might be the
result of one large swing in the equity, which is more or less the result of this strat-
egy. Knowing this, you can use this information when comparing several strategies
or fund managers with each other and avoid those that simply seemed to luck out
over a short period of time.372 PART 4 Money Management
Cumulative 12 months 24 months 36 months 48 months 60 months
Most recent: –24.38% –25.40% 27.05% 132.20% 153.45%
Average: 20.51% 54.51% 96.31% 129.07% 167.01%
Best: 145.21% 217.60% 255.75% 281.16% 289.60%
Worst: –28.25% –25.40% 4.76% 13.21% 19.19%
St. dev: 35.57% 69.90% 89.81% 95.42% 94.23%
Annualized 12 months 24 months 36 months 48 months 60 months
Most recent: –24.38% –13.63% 8.31% 23.44% 20.44%
Average: 20.51% 24.30% 25.21% 23.02% 21.70%
Best: 145.21% 78.21% 52.66% 39.73% 31.26%
Worst: –28.25% –13.63% 1.56% 3.15% 3.57%
St. dev: 35.57% 30.35% 23.82% 18.23% 14.20%TABLE 28.18
Strategy 12 Rolling Time-window Analysis