How to calculate cash loss over time?
If inflation is at 2% per annum, in a year you would need £102 to buy equivalent goods to what you could buy today.  So if you keep your money in a drawer the buying power of your £100 in a year will be only 100/102 = 98.039% of what it is currently. While it is a true loss, as you've determined, is not a cash cost, per se. A cash cost would be a decrease in cash holdings.  Inflation does not take your cash balance; it devalues it, so it is an accrued loss. Central banks are extremely lazy in determining inflation, so the highest resolution available at a public level is monthly.  In the United States, there is a small project that tries to calculate daily inflation rates and seems to do a decent job, but unless if you are a customer of a particular financial institution, you will suffer a lag.  The small project refuses to make the data public in real time or even allow outside analysis. In the UK, the Office for National Statistics is responsible for consumer inflation statistics.  The methodology is not readily available, but considering the name, it is most likely an inferior Laspeyres index instead of the optimal Fisher index as it is in the US. To calculate the accrued cost due to inflation, simply multiply the amount of money held by the price index value at the beginning of the time held and divide by the price index value at the end of the time held. For example, to determine the amount of value lost since March 2014, multiply the money held by the price index value for March 2014 and divide by June 2014. It helps to put the numbers in terms of an asset. Say a bottle of wine costs 10 dollars, but the price rises to 20 dollars a year later. The price has risen 100%, and your dollars have lost value. Whereas your ten used to be worth 100% of the price of bottle of wine, they now are worth 50% of the risen price of a bottle of wine so they've lost around 50% of their value. Divide the old price by the new inflated price to measure proportionally how much the old price is of the new price. 10 divided by 20 is 1/2 or .50 or 50%. You can then subtract the old price from the new in proportional terms to find how much value you've lost. 1 minus 1/2 or 1.00 minus .50 or 100% minus 50%. There are two things you need to keep in mind when you look at Inflation as an entity. Inflation is necessary to keep in check the value of goods. As per Moore's Law for example, a mobile phone that you buy for £100 today will be available for £50 in two years. With increased purchasing power, one needs to maintain balance between the purchasing power and its value. If you think about the 'loss' at a rate of 2% you would have £96.04 (in terms of today's value) in two years. But if you looked at the same cell phone as leverage for your business where it allowed you to do work and earn £1000 in two years - the investment would clearly offset the cost of inflation. Inflation is incentive for people to spend their money. If you for example spent all of your £100 today, it is £100 income for someone else. He has further incentive to spend it creating a chain of transactions. In theory while this is a true mathematical loss, the increasing purchasing power helps you leverage your financial asset to get a return on your investment.
"There are two ways to handle this. The first is that the better brokers, such as Charles Schwab, will produce summaries of your gains and losses (using historical cost information), as well as your trades, on a monthly and annual basis. These summaries are ""ready made"" for the IRS. More brokers will provide these summaries come 2011. The second is that if you are a ""frequent trader"" (see IRS rulings for what constitutes one), then they'll allow you to use the net worth method of accounting. That is, you take the account balance at the end of the year, subtract the beginning balance, adjust the value up for withdrawals and down for infusions, and the summary is your gain or loss. A third way is to do all your trading in say, an IRA, which is taxed on distribution, not on stock sales." So, the price-earnings ratio is price over earnings, easy enough. But obviously earnings are not static. In the case of a growing company, the earnings will be higher in the future. There will be extra earnings, above and beyond what the stock has right now. You should consider the future earnings in your estimate of what the company is worth now. One snag: Those extra earnings are future money. Future-money is an interesting thing, it's actually worth less than present-money- because of things like inflation, but also opportunity cost.  So if you bought $100 in money that you'll have 20 years from now, you'd expect to pay less than $100. (The US government can sell you that money. It's called a Series EE Savings Bond and it would cost you $50. I think. Don't quote me on that, though, ask the Treasury.) So you can't compare future money with present-money directly, and you can't just add those dollars to the earnings . You need to compute a discount. That's what discounted cash-flow analysis is about: figuring out the future cash flow, and then discounting the future figuring out what it's worth now. The actual way you use the discount rate in your formula is a little scarier than simple division, though, because it involves discounting each year's earnings (in this case, someone has asserted a discount of 11% a year, and five years of earnings growth of 10%). Wikipedia gives us the formula for the value of the future cash flow:  essentially adding all the future cash flows together, and then discounting them by a (compounded) rate. Please forgive me for not filling this formula out; I'm here for theory, not math. :) Annualize quarterly returns:      AR = (1+QR)^4  Where *QR* is a decimal return, e.g. 0.05.  Standard deviations are similar:      Annual SD = SD * sqrt(T)  If you have quarterly deviations, *T=4*, if you have daily, *T=252*, etc.  As an aside, for work with money riding on it, it is *not* okay to aggregate standard deviations if there's autocorrelation amongst observations at a smaller time scale. Volatility is often quoted this way and that's fine, but it is dangerous to do any sort of risk management with this and you'll require more due diligence. It's a good enough approximation for napkin math, though. "Treat each position or partial position as a separate LOT. Each time you open a position, a new lot of shares is created. If you sell the whole position, then the lot is closed. Done. But if you sell a partial quantity, you need to create a new lot. Split the original lot into two. The quantities in each are the amount sold, and the amount remaining. If you were to then buy a few more shares, create a third lot. If you then sell the entire position, you'll be closing out all the remaining lots. This allows you to track each buy/sell pairing. For each lot, simply calculate return based on cost and proceeds. You can't derive an annualized number for ALL the lots as a group, because there's no common timeframe that they share. If you wish to calculate your return over time on the whole series of trades, consider using TWIRR. It treats these positions, plus the cash they represent, as a whole portfolio. See my post in this thread: How can I calculate a ""running"" return using XIRR in a spreadsheet?" O boy you can take an entire on this. Here are the basics. Project future cash flows on a series of underlying assumptions such as growth rate and risk free rate. You then have to adjust top line items such as depreciation and come up with FCF. Then discount everything back with a terminal value. This link does it ok:  http://investexcel.net/1979/calculate-historical-volatility-excel/ Basically, you calculate percentage return by doing stock price now / stock price before.  You're not calculating the rate of return hence no subtraction of 100%.  The standard is to do this on a daily basis: stock price today / stock price yesterday. The most important and most misunderstood part is that you now have to analyze the data geometrically not arithmetically.  To easily do this, convert all percentage returns with the natural log, ln(). Next, you take the standard deviation of all of those results, and apply exp().  This answers the title of your question. For convenience's sake, it's best to annualize since volatility (implied or statistical) is now almost always quoted annualized.  There are ~240 trading days each year.  You multiply your stdev() result by (240 / # of trading days per return) ^ 0.5, so if you're doing this for daily returns, multiply the stdev() result by 240^0.5; if you were doing it weekly, you'd want to multiply by (240 / ~5)^0.5; etc.  This is your number for sigma.  This answers the intent of your question. For black-scholes, you do not convert anything back with exp(); BS is already set up for geometric analysis, so you need to stay there. The reason why analysis is done geometrically is because the distribution of stock returns is assumed to be lognormal (even though it's really more like logLaplace). "The best way to do this is to use IRR.  It's a complicated calculation, but will take into account multiple in/out cash flows over time along with ""idle periods"" where your money may not have been doing anything.  Excel can calculate it for you using the XIRR function" "I would suggest you forget everything you learned in economics. The only applicable knowledge is Accounting 101.  Step 1: An accrual basis financial statement. There is no step 2 if you don't do this. Most small business do everything cash basis. Simpler, cheaper but useless for analysis. You would get better answers from the local fortune teller than a cash basis statement.   Make one change from the general rules. If you have debt or are paying interest for inventory include that in your cost of sales. This is actually proper but the rule is little known and often ignored. Interest on debt up to the amount of inventory is a cost of inventory.  Step 2: Gross profit. If you seem to be working hard and still losing money it may be because you are selling products for less than they cost you. In this case the more you sell the more you lose. So suggestions like advertising or doing anything to increase sales are actually destructive.  Step 3 Price products at the level necessary to turn a profit at current sales and overhead. 'When we have enough sales we will make a profit"" is the philosophy of a start up business. It is toxic for a going concern.  Step 4 If sales are unsustainable at the price that produces a profit have the courage to sell or close the business. I have seen people waste their lives on futile endeavors just because they can't make that tough decision.  Finally Step 0: Ignore all other suggestions but this. They are well meaning but ill informed. To reiterate, growing sales while losing money on every transaction is a huge mistake. Trends, books, charts and graphs, analytics and market research are the tools of con-men and fortune tellers. Business is arithmetic and nothing more or less.  FYI if I don't get at least one upvote, this is the last time I am giving my valuable professional advice away for free on reddit. Folks will have to rely on the suggestions of their fellow college kids." The point of a total return index is that it already has accounted for the capital gains + coupon income. If you want to calculate it yourself you'll have to find the on-the-run 10y bond for each distinct period then string them together to calc your total return. Check XLTP if they have anything Generally speaking.  1. Take the position size / average daily volume.  2. Multiply that number by 10 or whatever 1/whatever % of volume you think you can execute, ( you can at best acct for 10 percent of traded volume on a day).  3. You now have days until liquidation (x)  4. Take the days until liquidation sample the return over  time x. I.e. if days until liquidation is 10, you would sample 10 day returns.  5. Calculate the distribution characteristics of this window (mean, var, skew, kurt) and calculate VaR based on some confidence.  You can now have a liquidity risk expected loss and a VaR.  If position is on margin don't forget to add the interest cost.  Note: Instead of taking 10 day return, you can take the 10 day VWAP and calculate return between Open and 10 day vwap. For this, the internal rate of return is preferred. In short, all cash flows need to be discounted to the present and set equal to 0 so that an implied rate of return can be calculated. You could try to work this out by hand, but it's practically hopeless because of solving for roots of the implied rate of return which are most likely complex. It's better to use a spreadsheet with this capability such as OpenOffice's Calc. The average return on equity is 9%, so anything higher than that is a rational choice. Example Using this simple tool, the formula variables can easily be input. For instance, the first year has a presumed cash inflow of $2,460 because the insurance has a 30% discount from $8,200 that is assumed to be otherwise paid, a cash inflow of $40,000 to finance the sprinklers, a cash outflow of $40,000 to fund the sprinklers, a $400 outflow for inspection, and an outflow in the amount of the first year's interest on the loan. This should be repeated for each year.  They can be input undiscounted, as they are, for each year, and the calculator will do the rest. See this spread sheet I worked up for fun.   https://docs.google.com/spreadsheets/d/1ZhI-Rls4FpwpdpEYgdn20lWmcqkIEhB-2AH0fQ7G2wY/edit?usp=sharing  If you are really crazy you can do what I did and model the rates (modified normal) and expenses (large items like the roofing being replaced on exponential) distribution and run a monte carlo simulation to get maximum likely losses by years and ranges of final values.  P.S. As a side note, this spreadsheet makes a lot of assumptions and I would consider it absolutely necessary to be able to build a sheet like this and understand all the assumptions and play with it to see how quickly this can turn into a losing investment before making any business investments. These are the steps I'd follow: $200 today times (1.04)^10 = Cost in year 10.  The 6 deposits of $20 will be one time value calculation with a resulting year 7 final value. You then must apply 10% for 3 years (1.1)^3 to get the 10th year result.  You now have the shortfall. Divide that by the same (1.1)^3 to shift the present value to start of year 7. (this step might confuse you?) You are left with a problem needing 3 same deposits, a known rate, and desired FV. Solve from there.  (Also, welcome from quant.SE. This site doesn't support LATEX, so I edited the image above.) Thanks for this, great in depth answer. I had previously calculated a WACC and have used it for my discount rate.   As part of your last point on revenue vs. cash, I've set a accounts receivable period of 30 days, and then applied a factor of 30/365 * revenue to understand what portion of my revenue is not cash in hand. Does that make sense? First, I believe that you can't just divide the losses over a number of years. I know that would be ideal as it might let you use the losses to only offset 25% income. A loss that gets you below zero taxable income would carry forward to the next year.  That said, I think it would be a great strategy to use the loss to offset a Roth conversion, in your case, from the traditional 401(k) to Roth 401(k). Keep in mind, as you've seen from using the 2016 tax year TurboTax, you should be able to make a fairly good estimate for your 2017 return. This could effectively use all of the loss to offset 25% income.  I'd look at the current projection and convert say 75-80% of the target amount immediately, then in November when the 2017 software comes out, convert the rest to get as close to your goal as you can.