Average Return Methodology

The Average Return return mode will use actual historical average annual return of the investment and apply that as the expected return. Note that the Average Return mode negates the market assumptions (i.e. S&P/10-year US Treasury assumptions) completely; changes to those assumptions will not have any effect on investments set to use the Average Return return mode.

When calculating Average Return, Riskalyze uses all of the historical data available. The Average Return will be calculated using actual price history from June 2004-present in cases where the investment existed in June of 2004 or earlier. For newer investments, the Average Return will be calculated using inception to present price history. Data for Separately Managed Accounts and variable annuity subaccounts will be from their inception in most cases.
We calculate the annualized number with the standard approach where (final price / initial price) ^ (1/number of years) - 1 = Average Return.

This return mode is best suited for investments that have unique (typically active) objectives where traditional beta adjustments or capture ratios understate the investment's realized risk/return characteristics. On a portfolio level, this functionality would allow an advisor to disregard the Market Assumptions inputs altogether. For example, an advisor who wants to view a portfolio through a static historical lens can toggle each investment in their portfolio to use the Average Return mode. However, advisors wishing to use the dynamic functionality provided by entering market outlooks in the data model will continue to be best served by using Advanced Risk Modeling.

NOTE: Some investments will have more historical price history than others based on their inception date. So, an equity investment with an inception of March 2009 will likely have a higher calculated average annual return than, say, an investment with an inception in January 2014. 

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