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    Computing Mean Historical Returns

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    mubarek oumer
    Computing mean historical returns allows investors to evaluate the typical performance of a single investment or portfolio over multiple years. The arithmetic mean return is calculated by summing all annual returns and dividing by the total number of years. Alternatively, the geometric mean return finds the nth root of the product of annual returns over several years. These mean returns provide summary measures of an investment or portfolio's rate of return that can be expected over an extended period of time.

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    Computing Mean Historical Returns

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    mubarek oumer
    149 views2 pages
    Computing mean historical returns allows investors to evaluate the typical performance of a single investment or portfolio over multiple years. The arithmetic mean return is calculated by summing all annual returns and dividing by the total number of years. Alternatively, the geometric mean return finds the nth root of the product of annual returns over several years. These mean returns provide summary measures of an investment or portfolio's rate of return that can be expected over an extended period of time.

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    Computing mean historical returns allows investors to evaluate the typical performance of a single investment or portfolio over multiple years. The arithmetic mean return is calculated by summing all annual returns and dividing by the total number of years. Alternatively, the geometric mean return finds the nth root of the product of annual returns over several years. These mean returns provide summary measures of an investment or portfolio's rate of return that can be expected over an extended period of time.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    149 views2 pages

    Computing Mean Historical Returns

    Uploaded by

    mubarek oumer
    Computing mean historical returns allows investors to evaluate the typical performance of a single investment or portfolio over multiple years. The arithmetic mean return is calculated by summing all annual returns and dividing by the total number of years. Alternatively, the geometric mean return finds the nth root of the product of annual returns over several years. These mean returns provide summary measures of an investment or portfolio's rate of return that can be expected over an extended period of time.

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    © All Rights Reserved
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    Remember one final point: The ending value of the investment can be the result of a positive or

    negative change in price for the investment alone (for example, a stock going from $20 a share to
    $22 a share), income from the investment alone, or a combination of price change and
    income.Ending value includes the value of everything related to the investment.

    Computing Mean Historical Returns

    Now that we have calculated the HPY for a single investment for a single year, we want to
    consider mean rates of return for a single investment and for a portfolio of investments. Over a
    number of years, a single investment will likely give high rates of return during some years and
    low rates of return, or possibly negative rates of return, during others. Your analysis should
    consider each of these returns, but you also want a summary figure that indicates this
    investment’s typical experience, or the rate of return you should expect to receive if you owned
    this investment over an extended period of time. You can derive such a summary figure by
    computing the mean annual rate of return for this investment over some period of time.

    Alternatively, you might want to evaluate a portfolio of investments that might include similar
    investments (for example, all stocks or all bonds) or a combination of investments (for example,
    stocks, bonds, and real estate). In this instance, you would calculate the mean rate of return for
    this portfolio of investments for an individual year or for a number of years. Single Investment
    Given a set of annual rates of return (HPYs) for an individual investment, there are two summary
    measures of return performance. The first is the arithmetic mean return, the second the geometric
    mean return. To find the arithmetic mean (AM), the sum (∑) of annual HPYs is divided by the
    number of years (n) as follows:

    AM =∑HPY/n

    where:

    ∑HPY = the sum of annual holding period yields

    An alternative computation, the geometric mean (GM), is the nth root of the product of the
    HPRs for n years.
    where:

    the product of the annual holding period returns as follows:

    ( HPR1) × (HPR2) ... (HPRn)

    To illustrate these alternatives, consider an investment with the following data:

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