/Difference between compounded and non compounded rate of return

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Difference between compounded and non compounded rate of return

ROR is the ratio of money gained on an investment relative to the amount of money invested. It can be calculated using the compounding or non compounding effect.

Compounded method

With it the ROR for n months Rn is computed as:

R0 = 0
Rn = Rn-1 + rn + rn · Rn-1 · 1%

where rn are monthly performance data (one value per month).

Non Compounded method

With it the ROR for n months Rn is computed as:

Rn = r1 + r2 + r3 + … + rn

where rn are monthly performance data (one value per month).

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