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The Effect of Start and End Date Changes on CAGR%


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The Effect of Start and End Date Changes on CAGR%
Original Test Dates
Revised Test Dates
Figure 12-1
The Effect of Changes in the Start and End Dates on CAGR%


during January 1996; there was also a drawdown in the last two
months of the test: May and June 2006. So, by moving the test dates
a few months, we were able to eliminate both of those drawdowns.
This is the same effect seen in Figure 12-1: Removing a drawdown
on either end of a test will increase the slope of the line that defines
CAGR%. 
Regressed Annual Return (RAR%)
A better measure of the slope is a simple linear regression of all the
points in each line. For readers who do not like math, a linear
regression is a fancy name for what sometimes is called a best fit
line. The best way to think about this is to realize that it represents
the straight line that goes through the middle of all the points,
much like what would happen if you stretched the graph and
removed all the bumps by pulling on the ends without changing
the overall direction of the graph.
This linear regression line and the return it represents create a
new measure that I call the regressed annual return, or RAR% for
short. This measure is much less sensitive to changes in the data at
the end of the test. Figure 12-2 shows how the slope of the line
changes much less when the endpoints for RAR% change.
We can see how the RAR% measure is less sensitive to changes
in the test dates by running the same comparison we ran earlier
because the two lines are much closer to having the same slope.
The RAR% for the original test is 54.67 percent, whereas the RAR%
for the altered dates is 54.78 percent, only 0.11 percent higher.
Contrast this with the CAGR% measure, which changed by 3.0
percent points from 43.2 percent to 46.2 percent. For this test, the

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