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how to calculate geometric average stock return. Using the sample numbers above 2000 1000 1 5 - 1 2 02 - 1 and. First add 1 to each return.
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Denote the initial amount of the investment by P the final return by F and the number of years by N. Again geometric returns reflect the impact of compounding. The general formula for the geometric mean of n numbers is the nth root of their product.
Using the geometric average return formula the rate is actually 595 and not 6 as stated by the arithmetic mean return method.
N is the total number of sub-periods for which return is available. Geometric average return can be calculated using the following formula. In the light of equation 1 we can arrive at. Geometric mean return is a more complicated method of calculating the average rate but its more accurate than the arithmetic one.
