Geometric Return and Portfolio Analysis

Brian McCulloch ()
Additional contact information
Brian McCulloch: The Treasury, https://treasury.govt.nz/

No 03/28, Treasury Working Paper Series from New Zealand Treasury

Abstract: Expected geometric return is routinely reported as a summary measure of the prospective performance of asset classes and investment portfolios. It has intuitive appeal because its historical counterpart, the geometric average, provides a useful annualised measure of the proportional change in wealth that actually occurred over a past time series, as if there had been no volatility in return. However, as a prospective measure, expected geometric return has limited value and often the expected annual arithmetic return is a more relevant statistic for modelling and analysis. Despite this, the distinction between expected annual arithmetic return and expected geometric return is not well understood, both in respect of individual asset classes and in respect of portfolios. This confusion persists even though it is explained routinely in finance textbooks and other reference sources. Even the supposedly straightforward calculation of weighted average portfolio return becomes somewhat complicated, and can produce counterintuitive results, if the focus of futureorientated reporting is expected geometric return. This paper explains these issues and applies them in the context of the calculations underlying the projections for the New Zealand Superannuation Fund.

Keywords: Arithmetic; geometric; returns; portfolio; lognormal distribution. (search for similar items in EconPapers)
JEL-codes: C53 D84 G10 H55 (search for similar items in EconPapers)
Pages: 16
Date: 2003-12
New Economics Papers: this item is included in nep-cfn and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://treasury.govt.nz/sites/default/files/2007-09/twp03-28.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztwps:03/28

Access Statistics for this paper

More papers in Treasury Working Paper Series from New Zealand Treasury New Zealand Treasury, PO Box 3724, Wellington 6140, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by CSS I&T Web & Publishing, The Treasury ().