What does the cumulative wealth index measure?

The cumulative wealth index measures the aggregate effect of returns over time given a starting amount. This concept is vital as it provides a way to understand how an initial investment can grow over time through the compounding of returns. The cumulative wealth index takes into account all the returns that an investment generates, effectively showing the total accumulated wealth up to a certain point, considering both positive and negative returns throughout the investment period.

This measurement is particularly useful for investors and financial planners, as it reflects the long-term growth potential of an investment strategy. It highlights the importance of maintaining a consistent investment approach to maximize growth over time, showing how reinvested returns contribute to overall wealth accumulation.

The other options address different financial concepts that do not align with the specific function of the cumulative wealth index. For instance, while the impact of interest rates, annual growth rates, and risks associated with market fluctuations are relevant to investment considerations, they do not encapsulate the comprehensive view of cumulative returns over a specified duration that the cumulative wealth index provides.