Wednesday, August 19, 2009

Curious Case of BSE Sensex

If you had Rs 100 on August 17, 2007 and then by some passive means (say, index fund or portfolio of stocks mimicking the Sensex) let the money grow till August 18, 2009, you would have in hand Rs 106.30. Thus, the profit would be Rs 6.30.

Now, consider two periods with 99 days: the first starting August 17, 2007 and ending on January 8, 2008; and the second starting March 25, 2009 and ending on August 18, 2009. Then, follow the same investment strategy but just for 99 days. Rs 100 invested on August 17, 2007 would give Rs 147.60 on January 8, 2008; and, Rs 100 invested on March 25, 2009 would give Rs 155.50 on August 18, 2009. The difference in profits between the two 99 day periods being (Rs 155.50 – Rs 147.60), i.e., Rs 7.90 which is reasonably close (given the volatility of the market) to the profit made if invested for the entire period of 490 days.

Summary: If you invest Rs 100,

Profit if invested for entire 490 days: Rs 6.30
Profit if invested for first 99 days: Rs 47.60
Profit if invested for last 99 days: Rs 55.50
Difference of profit between last 99 days and first 99 days : Rs 7.90

Disclaimer: Please do let me know if there are any errors. Of course, I am not predicting the future (just observing a curious case).

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