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One approach is to use an exponential utility function: $U(x) = -e^{-\lambda x}$. Here, $\lambda$ records what is known as the absolute risk aversion. Exponential utility functions are nice because they have a wealth independence property (of course, this may be seen as a drawback). As we will see below, the initial capital $X$ plays no part in the ...

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I'm currently also using daily returns which I want to annualize. This is my approach: For every month, I calculate the simple return using the formula: (end-of-month closing price / beginning-of-month closing price) - 1. I use the Excel formula somproduct(geomean(A1:A12+1)-1) to find the monthly compounded return. Finally, I annualize the result of step 2 ...

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When you say the return on firms, I take it you mean the change in the stock price of firms. If you were talking about the return of firms' investment strategies, then you would have to deal with cash inflows, which makes the answer more complicated. If you are having problems, there are two equivalent approaches that should give you the correct answer. In ...

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