Single Investment Given a set of annual rates of return (HPYs) for an individual investment, there are two summary measures of return performance. The first is the arithmetic mean return, the second is the geometric mean return. To find the arithmetic mean (AM), the sum (Σ) of annual HPYs is divided by the number of years (n) as follows:
Where:
ΣHPY = the sum of annual holding period yields
An alternative computation, the geometric mean (GM), is the nth root of the product of the HPRs for n years minus one.
Where:
Ï€ = the product of the annual holding period returns as follows:
To illustrate these alternatives, consider an investment with the following data:
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