Annual Returns

Annual SPY returns

SPY = S&P 500 Exchange Traded Fund (ETF)

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Compounded SPY returns

Compounded returns on log scale: motivation

• Let’s look at accumulations from two hypothetical stocks.
  • stock 1: 10% per year
  • stock 1: 2% per year until 2000 and 10% afterwards
• It will appear that stock 2 did nothing before 2000 and earned a lot less than stock 1 even after 2000.

Plot of the Example

Log (base 10) of accumulation

Map \(y\) tick labels to dollars

Compounded SPY returns on log scale

value of $1 investment with dividends reinvested

Box Plot

• Box contains 25th percentile through 75th percentile.

• Median is indicated as a line in the box.

• Fences extend 1.5 times inter-quartile range from 25th and 75th percentiles or to the most extreme observation if that is closer to the box.

  • inter-quartile range = 75th minus 25th percentile

• Points outside the fences are outliers.

  • If you simulate data from a normal distribution, there will typically be very few points outside the fences.

Box and density plots of annual SPY returns

Autocorrelations

• Autocorrelation is the correlation of a time series with its own lagged values.
• Autocorrelation at lag 1 tells us whether the current value predicts the next one.
• For monthly data, autocorrelation might be high at lag 12 (seasonality).

Autocorrelations of annual SPY returns

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Does last year’s return predict this year’s?