The formula to calculate the compound daily growth rate of a leveraged ETF is:
R=kμ−12k2σ21+kμ
Where:
The rate of convergence refers to the speed at which a sequence of numbers approaches a certain value or limit. In the context of leveraged ETFs, it helps determine how many iterations (days) are needed to achieve a certain level of accuracy in returns.
Let's assume the following values:
Step 1: Convert the mean daily return and daily volatility to decimals:
μ=0.0005andσ=0.01
Step 2: Calculate the compound daily growth rate:
R=2×0.0005−1222×0.0121+2×0.0005=0.001−0.00021.001≈0.001−0.0001998=0.0008002
Step 3: Convert to annualized percentage:
Annualized R=0.0008002×252×100≈20.16%
Therefore, the annualized compound daily growth rate is approximately 20.16%.
Resouce:https://www.ddnum.com/articles/leveragedETFs.php