Question on exponential growth???
- Thread starter riddler
- Start date
It means the equity curve will mimic the well known exponential curve.
http://en.wikipedia.org/wiki/Exponential_function
It is common in finance to model compounded returns as exponential.
If you have a perfect risk free return per period, it grows exponentially, but at a very slow rate (practically speaking).
I.e. imagine you could get 1% return guaranteed (risk free) per month.
Starting with $100
month 1 would be $101
it would be reinvested into month2
at $101*(1+.01)=102.1
If you keep plugging in the numbers recursively, you'll see the curve grows exponentially.
http://www.moneychimp.com/articles/finworks/fmfutval.htm
It's also what you see when you model a random walk (not risk free) with positive drift. The random part is variance or volatility, which traders generally don't want to see (at least negative) as it means risk or uncertainty.
The more constant drift your curve has, the smoother your equity curve and the more ideally you mimic the exponential curve (think of drift as analogous to the risk free growth metaphor above).
Hope that helps.
P.S. not sure this belongs economics, so mods might want to move it to educational resources or a more appropriate thread.
http://en.wikipedia.org/wiki/Exponential_function
It is common in finance to model compounded returns as exponential.
If you have a perfect risk free return per period, it grows exponentially, but at a very slow rate (practically speaking).
I.e. imagine you could get 1% return guaranteed (risk free) per month.
Starting with $100
month 1 would be $101
it would be reinvested into month2
at $101*(1+.01)=102.1
If you keep plugging in the numbers recursively, you'll see the curve grows exponentially.
http://www.moneychimp.com/articles/finworks/fmfutval.htm
It's also what you see when you model a random walk (not risk free) with positive drift. The random part is variance or volatility, which traders generally don't want to see (at least negative) as it means risk or uncertainty.
The more constant drift your curve has, the smoother your equity curve and the more ideally you mimic the exponential curve (think of drift as analogous to the risk free growth metaphor above).
Hope that helps.
P.S. not sure this belongs economics, so mods might want to move it to educational resources or a more appropriate thread.
M
morganist
it means it has a multiplier effect. like animals when they breed.
it is also called the malthusian model. after thomas malthus who said the human population will grow until the factors enabling grow fail.
in short it will grow rapidly until fundamentals needed are exhausted.
