A friend of mine and myself are having an argument on how to correctly determine cumulative return.
The dataset has monthly return data and we are trying to determine the 6-month cumulative return.
I proposed the following: Cumulative return for 6 months is a product of monthly returns:
(1) Ri=(1+ri_1)∗ ... ∗(1+ri_6)−1
He mentioned just adding up the different return values:
(2) Ri=(ri_1)+ ... (ri_6)
Now I am pretty sure my way of calculating this is correct, although differences can be small.
Question Am I correct that when academic papers talk of cumulative return they calculate this with equation (1)
Thank you in advance. S Gontscharoff