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UNIT 1

Returns & Compounding

Returns multiply across time; losses and recoveries are not symmetrical.

Loss → recovery−50%+100%
What it tells you

How efficiently capital grew and how much recovery a loss demands.

When it is useful
  • Comparing investments
  • Planning drawdown limits
When it fails
  • Ignores risk by itself
  • Short periods can mislead
COMMON MISTAKE

Comparing dollar profits without adjusting for starting capital.

Evidence note

Geometric compounding is the standard way to link multi-period returns.

60-SECOND CHEAT SHEET

Remember this.

  1. 1Return = gain ÷ starting value
  2. 2−50% needs +100%
  3. 3Protect the compounding base
NEXT ACTIVITYPercent beats dollarsSeparate dollar profit from percentage performance.
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