1. Geometric Average/Arithmetic Average - These are both measures of central tendency.
1. Geometric Average: the average compounded return. The formula is expressed as follows:
 FormulaGM=n√((1.R1)(1+R2)...(1+Rn)-1
1. Arithmetic Average: division of the sum of the returns for each period by the number of periods under evaluation. The formula is expressed as follows:
 Formula n AM = ?HPRt/n t=1

 2001 2002 2003 2004 2005 17.9% 8.73% 9.01% 11.96% 14.32%

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).

 1/5√(1.179)(1.0873)(1.0901)(1.1196)(1.1432)-1= 12.33%

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.

 17.9%+8.73%+9.01%+11.96%+14.32%/5=12.38%

1. Time-Weighted Return/Dollar - Weighted Return:
1. 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.
2. 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.)

Related Articles
1. Investing

### Breaking Down The Geometric Mean

Understanding portfolio performance, whether for a self-managed, discretionary portfolio or a non-discretionary portfolio, is vital to determining whether the portfolio strategy is working or ...
2. Investing

### Explaining Expected Return

The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
3. Investing

### Internal Rate of Return Formula for Excel

The internal rate of return, or IRR, is a popular metric businesses use to measure a projectâ€™s return on investment.

### Calculating the internal rate of return using Excel

Find out how to calculate the internal rate of return on investments using Microsoft Excel, as illustrated in different investment scenarios.

Measure the success of your investment solely on the portfolio return may leave you blindsided to the risk you are taking. Learn three ratios that will help you evaluate your investment return. ...
6. Investing

### The Effective Annual Interest Rate

The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
7. Investing

### QQQ: An ETF Performance Case Study

Explore how seasonal trading trends have helped the PowerShares QQQ ETF beat its tracking index since 2012, including the three months with the highest returns.
8. Investing

### The Equity-Risk Premium: More Risk For Higher Returns

Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
9. Managing Wealth

### 3 Steps to Assess Your Portfolio's Annual Performance

Learn about three simple steps you can use to evaluate the annual performance of your investment portfolio, and why rate of return isn't enough.
10. Investing

### Continuous Compound Interest

Different frequency in compound interest results in different returns. Check out how continuous compounding accelerates your return.