SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: Mathemagician who wrote (13733)6/26/2001 9:56:41 PM
From: Dan Duchardt  Read Replies (1) of 14162
 
mathemagician,

Agree 100% on the ROI calculation. Return is based on how much money you have to tie up to make the profit, or sometimes an unfortunate loss.

But on the issue of the rule of 72, I think you are off a bit.

Really, you're dividing ln(2) by the rate as a decimal. ln(2) is about .693, so .70 is used as a close approximation. Using 72 instead of 70 is like making a rough adjustment from continuously compounded interest to annually compounded interest.

The true time to double for discrete periods is ln(2)/ln(1+rate), which converges to ln(2)/rate only for fractional percentages, and it is better approximated by the rule of 72 than by continuous interest for common discrete interest rates. 72 gives almost exactly the right answer for 9 periods at 8%. It gives the right "time to double" within 1% for all rates from 6% to 10% and within 5% for any percentage up to almost 20. While the continuous interest calculation is near perfect for fractional percentages it is off by nearly 9% for a 20% discrete interest. 72 is a number that happens to factor nicely into many sets of whole number products, and also happens to be a very good approximation to the time rate product of common interest percentages. Using 70 instead of 72 would be a worse approximation in most cases of interest, as well as having fewer whole number factors. 72 is used instead of 69.3 or 70 for both convenience and for greater accuracy.

Dan
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News