The Financial Times Guide to Understanding Finance, 2nd Edition

2

Returns II: Mean returns

• The arithmetic mean return
• Russia, 1995–98
• The geometric mean return
• The relationship between AM and GM
• The dollar-weighted mean return
• The big picture
• Excel section

In the previous chapter we discussed how to compute periodic returns. In this chapter we’ll focus on how we can summarize some of the information provided by those returns. We’ll look at two ways to assess the return performance of an asset and the relationship between them. We’ll also discuss how to assess the performance of an investor in an asset, and why it may differ from the performance of the asset itself.

The arithmetic mean return

Take a look at Table 2.1, which shows the (simple) annual returns of the Russian market and the Swiss market ...