![]() ![]() This is because of the mathematics involved in their calculations. So, the geometric mean does a better job of reflecting the investor’s experience over the holding period.įinally, for any given series of return observations, the geometric mean return is always smaller than the arithmetic mean return. Let’s see how the geometric mean return compares with the arithmetic mean return in this case. Note that your holding period return after two months is 0% since you bought the stock for $10 and it’s still worth $10. But, the value of the stock rolls back to $10 in the second month, which is a net return of $10/$20 − 1 = −50%. Next, imagine that you buy a stock for $10, and its value doubles to $20 in the first month, which implies a net return of $20/$10 − 1 = 100%. In contrast, the geometric average return tells about the monthly rate of return at which the investor’s investment grew over the 24-month period. We now focus on the differences between geometric average return and arithmetic average return.įor an investor who held a stock for, say, 24 months, the arithmetic average return simply tells the average of 24 monthly return observations. The geometric mean return is calculated at the bottom, and the arithmetic mean return is provided for comparison purposes as well.If you have got, say, 3 return observations, make sure to enter them in the Return 1, Return 2, and Return 3 fields, and not in any of the other fields.You can enter up to 10 return observations.In mathematics there is no particular notation for. If the second return observation is −5%, enter −5 in the “Return 2 (%)” field, and so on. To calculate the geometric mean of a set of N data values we need to extract the Nth root of their product. ![]() ![]() For example, if the first return observation is 20%, simply enter 20 in the “Return 1 (%)” field. Please note the following when using the geometric average return calculator: In this case, calculating the geometric average return is straightforward. Month Return Month Return January 2.1% July −0.2% February −1.2% August −0.2% March −0.6% September 1.1% April 0.4% October 0.4% May 1.2% November −0.1% June 0.0% December 1.9% Imagine that you bought a stock a year ago, and the monthly returns over this period were as follows.
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