What is the main consequence of Selection Bias in returns calculation?

Selection bias in returns calculation primarily leads to an overestimation of investment performance. This bias occurs when the sample of returns includes only the best-performing investments, which may not be representative of the entire spectrum of assets. When returns are calculated using only higher selling prices, it creates a skewed representation of actual performance, as it ignores lower-performing assets that could provide a more accurate picture of market behavior.

In the context of performance evaluation, this means that investors and analysts may not have a clear understanding of the true risk and return profile of the investment strategy or fund. By focusing solely on higher selling prices, the calculations can mislead stakeholders regarding the effectiveness and reliability of the investment approach. Thus, the implications of selection bias can profoundly impact decisions made by investors, policymakers, and financial managers, leading to potentially flawed conclusions and strategies.