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Unformatted text preview: In short, the arithmetic return describes expected returns well. Geometric-Mean Returns The geometric-mean return is the internal rate of return between one outlay and future returns. It measures actual investment experience better than the arithmetic mean. For instance, suppose you realize the following returns: Value of Investment--$1.00 1 100% $2.00 2-50% $1.00 Time Return The arithmetic-mean return is 25 percent. The geometric-mean return is 0 percent, which is exactly consistent with the fact that you have no more money at the end of the investment holding period than you invested at the beginning. In short, the geometric mean measures historical investment experience accurately. 1 I believe that the material above is based on a note published by Brunner (Darden) in conjunction with the Grand Metropolitan Case....
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- Fall '06