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Simple Arithmetic Question
Septus
Registered User regular
Registered User regular
I cannot for the life of my figure out why this one method of calculation would be better than another.
In Excel, I'm trying to calculate average percent increases from a series of historical data. The way I was initially going to tabulate it, was take the most recent year's data, subtract the first year's, and divide that by the first year's.
However, I think I get a more accurate percent change by individually applying the equation ( (x-y)/y ) to each year in the series, and then adding the individual percent changes of each year, and dividing that by the number of years. I can't seem to understand the underlying concept of why the latter would be more accurate.
In Excel, I'm trying to calculate average percent increases from a series of historical data. The way I was initially going to tabulate it, was take the most recent year's data, subtract the first year's, and divide that by the first year's.
However, I think I get a more accurate percent change by individually applying the equation ( (x-y)/y ) to each year in the series, and then adding the individual percent changes of each year, and dividing that by the number of years. I can't seem to understand the underlying concept of why the latter would be more accurate.
PSN: Kurahoshi1
Septus on
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Posts
I've had both.
I should be able to explain this. The order matters. Take the case of 2 different investment funds over 10 years.
case 1: 5%/year for 10 years
case 2: -50% the first year, +10% for 8 years, + 20% for the last year.
case 1: $100 -> ~$163
case 2: $100 -> $50 -> ~$107 -> ~$128
each of these averages 5%/year if you average the annual percentage point change, instead of the overall return. Deciding which method depends on how you're using it. You might want to include both. This is often done in investment talk using a "growth of $10k" as well as an "average return"