- Geometric Average/Arithmetic Average - These are both measures of central tendency.
- Geometric Average: the average compounded return. The formula is expressed as follows:
- Arithmetic Average
AM = ?HPRt/n
Geometric Average - Geometric average is always less than the arithmetic mean, except when returns are equal for each period. Then, the geometric and arithmetic averages would be equal. This average is the same as the internal rate of return (IRR).
Arithmetic Average - does not take into account the compounding effects of returns. It is good for approximating the earning rate over time, but will tend to be less accurate if returns fluctuate widely from year to year.
- Time-Weighted Return/Dollar - Weighted Return:
- Time-Weighted Return: a measure of the performance of an investment over time without regard to cash flows in either direction. This is the preferred return measure that planners use, as it strips out the bias that cash flows create with a dollar-weighted return.
- Dollar-Weighted Return: a measure of performance of an investment over time, only here cash flows figure into the return calculation, giving effect to inflows and outflows of money.
Measures of Investment Return (Contd.)
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InvestingThe compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that ...
InvestingThe arithmetic mean is the average of a sum of numbers.
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InvestingThe annualized total return is the average return of an investment each year over a given time period.
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Managing WealthTotal return measures the rate of return earned from an investment over a period of time.
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