Saturday, February 7, 2009

Semi-log Chart Shows Steady Rate-of-Growth

A traditional Equity Curve chart uses a linear axis. A linear axis has the effect of distorting the rate-of-change when equity is compounding over a long time period. That's why charts showing equity curves are sometimes called "mountain charts." Fund marketers love them! They are very flattering. The compounding effect makes it look like the returns are accelerating sharply, while the rate-of-change may actually be constant or even declining.

A better way to visualize the model's rate-of-change is a semi-log chart, used to visualize data that are changing with an exponential relationship as with a compounding return.

In this semi-log chart showing the equity curve, it is easy to see that the rate-of-growth for the model's equity has been fairly consistent over time.

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