Volatility drag - i

Calculus Level 3

It seems that investments with a constant rate of return $r_0$ end up with a different return than investments whose average rate of return is $\langle r(t) \rangle = r_0$ . Might fluctuations in the return rate dissipate potential gains, like friction dissipates kinetic energy in physics?

Which of the following explains what's going on?

Downshifts are weighted more heavily than upshifts in the average return rate. Downshifts are more likely to occur late in the trading day, leaving no time for a correction. The result does not generalize, fluctuations do not shift expected returns. To compensate return rate downshifts, a bigger return rate upshift is required.

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Volatility drag - i

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