Interactive finance model

Volatility Drag Model

Follow a population of investors period by period. A risky asset can have an arithmetic expected return of zero while repeated compounding steadily destroys the wealth of the typical investor.

Classic case: (1 + 50%) × (1 − 50%) = 0.75
Current period
0 / 60
Arithmetic return
0.00%
Geometric return
−13.40%
Mean wealth
$100.00
Median wealth
$100.00

Current wealth distribution

The upper 1% is clipped so the experience of typical investors stays visible.

Wealth through time

Blue: mean. Orange: median. Dashed: the $100 safe asset.

Ready: Press Start to watch the mean and median separate as returns compound.