Financial Analysis - Build a ChatGPT Pairs Trading Bot - Return Computation Revisited (Code)

The lecture discusses changes made to use percent returns for calculating portfolio returns. It explains the process of computing cumulative returns using the cumulative product of gross returns, and highlights optional adjustments to obtain percent returns. An example with Coca-Cola and Pepsi is provided to illustrate the concept, showing how the return values change slightly with the new method.

What is the primary reason for using percent returns in portfolio calculations?

• To avoid using complex mathematical functions

• To allow for the addition of returns

• To ensure returns are always positive

• To simplify the calculation process

How is the cumulative return calculated according to the lecture?

• By adding all individual returns

• By averaging the percent returns

• By multiplying the gross returns cumulatively

• By subtracting the initial investment from the final value

What optional step can be taken to convert gross returns to percent returns?

• Subtracting 1 from the gross return

• Multiplying the gross return by 100

• Dividing the gross return by the initial value

• Adding 1 to the gross return

Why does the logarithmic function make the return appear smaller?

• Because it reduces the base value to zero

• Because it grows more slowly than a linear function

• Because it compresses larger values

• Because it is a non-linear function

What was the observed change in returns for Coca-Cola and Pepsi after applying the discussed method?

• The returns fluctuated unpredictably

• The returns increased slightly

• The returns remained the same

• The returns decreased significantly