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how to calculate geometric mean return on ba ii plus. A simple example of the geometric mean return formula would be 1000 in a money market account that earns 20 in year one 6 in year two and 1 in year three. N is the total number of sub-periods for which return is available.
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The Geometric Mean is a special type of average where we multiply the numbers together and then take a square root for two numbers cube root for three numbers etc. When the return or growth amount is compounded the investor needs to use the geometric mean to calculate the final. Geometric Mean X 1X 2X 3X N 1N Where X Individual score N Sample size Number of scores.
Example of the Geometric Mean in Finance.
A simple example of the geometric mean return formula would be 1000 in a money market account that earns 20 in year one 6 in year two and 1 in year three. This is equivalent to raising 19500 to the 15-th power. It would be incorrect to use the arithmetic mean of adding the rates together and dividing them by three. It allows understanding the effect of compounding of a portfolio of financial instruments investments.
