A financial modeling tutorial on three calculations in Excel including geometric arithmetic and log return for Finance and quantitative investment portfolio. 1 R 1 1 R 2 1 R 3 1 R n 1 n 1 where. One problem with arithmetic mean is that it assumes the returns on the investment made at the beginning of each period.
Raise the product to the power of 1 divided by the number of returns n.
Where R1 R2 and Rn are sub-period returns for period 1 2 and n respectively and. Put simply the geometric average return takes into account the compound interest over the number of periods. For example suppose an investment returns the following annually over a period of five full years. Calculation of the geometric mean using the log indices.