# Calculating Compound Annualized Rate of Return (Negative Mantissa)

According to Kaufman (Trading Systems and Methods, 2013), the compound annualized rate of return is calculated as follows:

$$\mathrm{AROR}_\mathrm{compound} = \left[ \left( \frac{\mathrm{Final Balance}}{\mathrm{Initial Balance}} \right)^ {\frac{252}{\mathrm{length of testing period}}} \right]- 1$$

where the selection of 252 is based on an American trading calendar.

My question is: If the mantissa is negative, i.e. we incurred a negative balance at the end and we raise it to a fraction (which would happen with testing periods more than a year), then the result of this calculation would be a complex number. How do we calculate $$\mathrm{AROR_{compound}}$$ in this case?

• You cannot compute a rate of return if you have a negative final balance. The rate of return mathematically does not exist in this case. Usually you start trading with a certain amount of money, once the balance goes to zero you have to stop. – noob2 Oct 25 '18 at 17:52
• The negative returns result from allowing short positions with no limit (assuming infinite credit). When resolving these positions by the end of testing, you could sometimes easily lose all your current balance and end up in debt (hence the negative returns). How would you suggest I handle such positions? – Ismail Mohamed Nov 3 '18 at 23:54