Summarizing Annualized Returns: Easier Said Than Done

摘要

Finance and investments textbooks routinely prescribe the arithmetic and geometric means for summarizing holding period returns. While the former calls for dividing the sum of the HP Rs by the number of periods, the latter solves for the nth root of the product of the returns. Sometimes referred to as the time-weighted rate of return or compound annual rate of return, the geometric mean tells you what you actually earned per year on average; by contrast, the arithmetic mean conveys what you earned in an average year (Ross et al., 2007). That distinction, however, becomes a little blurred when the task is to summarize annualized returns.