What is the mean for the log price relative?

Subtracting the interest rate at which the stock is expected to return the highest rate, you can calculate the log-price relative mean. In this case, it would be equal to 15%:  Mean Log Price Relative = 20% – 5% = 15%. This refers to how much higher returns on stocks are expected to be compared to those that are deemed “risk free,” such as treasury bonds or bank deposits. It is used to show how much more money investors can expect from investing in an asset class that has a higher volatility than one with no associated risk.

This figure is not only important for understanding, but also to acknowledge its limitations. Volatility does reflect risk-return tradeoffs in a way that’s always accurate. If expectations of its performance in the future are not accurate, then a stock may have high volatility and relatively low returns. Investors, while aiming for high returns, must consider other factors that may affect their investment decisions. These include liquidity needs or diversification requirements. Ultimately then, while knowing one’s mean log price relative can provide useful insights into potential returns on investments under normal conditions these figures should always be evaluated together with additional criteria in order determine an optimal portfolio allocation strategy that takes into account all relevant considerations before committing funds.