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Geometric mean I’m surprised to see no mention of geometric mean. People far too often incorrectly use Arithmetic Mean (“average”), which doesn’t compute corr
by tiffanyh 4y ago
Geometric mean
I’m surprised to see no mention of geometric mean.
People far too often incorrectly use Arithmetic Mean (“average”), which doesn’t compute correctly due to the compounding nature of the stock market.
https://www.investopedia.com/articles/investing/071113/breaking-down-geometric-mean.asp https://www.investopedia.com/articles/investing/071113/break...
- Galanwe 4y agoI don't see how that relates to the article?
- tiffanyh 4y agoThe graphs are about long term returns. And how are those returns calculated? Because if they used arthritic mean, it’s overstating the actual annualized return.
- Galanwe 4y agoTwo things to note here. First, it does not "overstate" the annualized returns. It just brings a particular view of them, which is the "expected annual return" vs the "compoundable annual return". Both are perfectly equivalent and represent different ways to look at annual returns. I would expect most practitioners to expect the former. Second, this debate is completely irrevant here, as all charts show cumulative returns based on a $1 investment.
- kqr 4y agoIt looks like they based it on the arithmetic mean of log-returns, which is equivalent to taking the geometric mean.
- 314 4y agoOne of the main discussions in the paper is about the difference between arithmetic means and geometric means, and how people have different perceptions of annualized returns. Perhaps you should read it (again)?