Evaluate historical investment performance with return metrics that account for compounding.
Overview
Average return can be measured in more than one way.
Arithmetic average is simple mean, while geometric average reflects compounding reality.
For multi-year growth interpretation, geometric return is usually more informative.
This calculator helps avoid overestimating performance in volatile sequences.
Steps
Input yearly or periodic returns as percentages.
Compute arithmetic and geometric averages.
Compare difference between mean and compounded view.
Assess how drawdowns affect geometric return.
Adopt conservative metric for forward assumptions.
Math
Geometric Avg = [(1+r1)(1+r2)...(1+rn)]^(1/n) - 1
Geometric average captures the constant compounded rate equivalent to observed return path.
Worked cases
Arithmetic = (20-10+15)/3; geometric uses product method.
Geometric return is lower than arithmetic due to volatility drag.
Both averages converge under stable series.
Arithmetic and geometric outputs are nearly identical.
Run compounded sequence.
Single large loss can materially reduce geometric average.
Why use this
Questions