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I'm running backtests with monthly data going back to the 1920's and I'd like to compare different strategies using inflation adjusted CAGR. But I don't know how to calculate it. Would any of these work? What's the right way?

  1. Could I deflate the starting value of the portfolio using an inflation rate (current_cpi / cpi_at_start)and then use the normal CAGR calculation?

  2. Could I use the normal CAGR calculation to get the nominal return and then calculate the inflation rate (again: (current_cpi / cpi_at_start), then plug those into the inflation adjusted return formula from here: https://www.investopedia.com/terms/i/inflation_adjusted_return.asp

  3. I have all the monthly data... I could calculate monthly returns (logarithmic or otherwise) but then what would I do with them?

Thanks! Brett

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  • $\begingroup$ Wouldn't it be better to compare returns of strategies sharing the same vintage? Otherwise you'll run into much more than just varying inflation rates due to business cycles and so forth. Aligning by vintage gets you closer to "all else being equal" in other words. $\endgroup$
    – C8H10N4O2
    Apr 5 at 23:12
  • $\begingroup$ Yes that is very true and for the most part I do. But, sometimes I don't have data for all the asset classes going back that far. $\endgroup$ Apr 6 at 0:58
  • $\begingroup$ I have created a spreadsheet, that demonstrates how I think this should be calculated: docs.google.com/spreadsheets/d/… $\endgroup$ Apr 6 at 1:21

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