CFA Level I · CFA Level I Exam · Types of Financial Returns
An analyst wants a single measure that best describes the compound rate at which an investor's wealth grew over several past years. Which measure is most appropriate?
The geometric mean return is most appropriate. It compounds the periodic returns and gives the constant annual rate that turns the starting value into the ending value, which is what describes historical growth of wealth. The arithmetic mean ignores compounding and overstates growth when returns vary.
- AGeometric mean returnCorrect
- BArithmetic mean return
- CMedian periodic return
Explanation
The geometric mean return links periodic returns by compounding, so it equals the constant per-period rate that turns the beginning value into the ending value. The arithmetic mean ignores compounding and overstates growth when returns vary. The median is a measure of central tendency that does not reproduce ending wealth.
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