Calculate arithmetic mean, geometric mean, and annualized returns for your investments. Understand the true performance of your portfolio across multiple periods.
Why are the values different?
Arithmetic mean is a simple average, while geometric mean accounts for compounding. Annualized return adjusts for the actual time invested. For volatile returns, geometric mean is typically lower and more accurate.
The arithmetic mean is the simple average of all returns. It adds up all the returns and divides by the number of periods.
This measure is easy to understand but doesn't account for compounding effects, which can overestimate actual returns.
The geometric mean calculates the compound average growth rate. It's more accurate for investment returns because it accounts for the compounding effect.
This is the same as Compound Annual Growth Rate (CAGR) when all periods are equal. It always equals or is less than the arithmetic mean.
The annualized return converts your total return into an equivalent annual rate, accounting for the actual time invested (years and months).
This metric is especially useful when comparing investments held for different time periods.
Consider an investment with these annual returns:
Notice how the geometric mean (7.29%) more accurately reflects the actual compound growth compared to the arithmetic mean (8.33%).