Arithmetic vs. Geometric Return

This video shows how the arithmetic return and geometric return (aka compound annual return or compound annual growth rate) can yield very different rates of return. This occurs because the arithmetic rate of return does not account for the effects of volatility and compounding. For practical purposes, the arithmetic average return is best used when forecasting future, expected returns while the geometric return is superior for examining the historical performance of a stock or index.
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[@michaelhuddleston9324]

This Minnesota Golden Gopher is eternally thankful for your videos

[@Anonymous-we4eu]

Hi, can you please explain why do we use arithmetic return for forward looking calculations? I understood why we use geometric return for historical purpose. Thank you for your efforts behind these amazing videos!

[@HardikBhakhar]

Exactly what I was looking for .. after reading a blog on Bernoulli’s paper .. cheers 🍻

[@doreentan207]

love your teaching!! straight to the point!

[@clarkianturner]

Thank you im taking a finance class and couldn't understand the difference. My instructor had a hard time explaining that to me

[@AAA11546]

This is so incredibly useful for my Statistics module, thanks for this!!

[@thegoosie1]

absolutely amazing explanation and straight to the point! Keep it up!

[@Edspira]

Thanks Gustavo!

[@willi1397]

Thanks playa! Great explanation of a very useful tool for stock analysis.

[@Edspira]

😆

[@likithcr8492]

If the cost of capital is estimated from historical returns or risk premiums, use arithmetic averages, not compound annual rates of return.

[@jagshivani]

Thank you for explaining in such an simple manner. I appreciate it alot

[@victors8718]

Great explanation! Crystal clear

[@geraltofrivia287]

Finally a video that explains this topic

[@mann4862]

Thank you! Great explanation !!

[@DEIMOSLOL]

very straight forward and simple, thanks

[@Edspira]

No problem. Take Care!

[@ykam9199]

Thanks so much for the video

[@codyjohnson9386]

Thanks! I wish more videos would just get straight to the point like this one!

[@samidelhi6150]

Geometric mean is not the same as cage , but we use the statistic of geometric mean return while calculation of cagr

[@notsomuchhere1387]

Thanks! I have my investment midterm in 2 days and I'm working to get an A

[@Edspira]

Best of luck!

[@mohamedkhaled8555]

Thank you so much.

[@DownTownDowns]

How does this work for negative numbers? For example, the GEOMEAN function in Excel will only return absolute positive values

[@JJS998]

Great explanation

[@DeadMyth110]

Thank you

[@Edspira]

You're welcome!

[@KeesJansma7689]

I don't understand why it isn't problematic when you use the arithmic mean for future expected returns. I know you forecast then, but you still have the same 'balance' problem, right?

[@willi1397]

Smoke and mirrors my dude. You can't 'forecast' future results based off past results. Any prospectus has a disclaimer saying this. All you can do is try to look at the information in front of you and attempt to make a correct decision. In stocks there are only 2 options, buy or sell. That lever exerts more control over RoR than almost anything else.

[@gifted_tomato]

Thank you ! for sharing

[@Hugo-xj2mj]

Thank you very much!

[@Slma3a]

man you're the best

[@akashsaini9856]

Can u plzz understand how u solve the equation [{1.25)(.6)(1.3)]1/3-1

[@JonesDawg]

Multiply 1,25 ; 0,6 and 1,3 then you take the cube root (power 1/3) then you subtract 1

[@robinpathania1400]

Can you simplify more

[@SuperGrey95]

Thank you !

[@robinpathania1400]

How to calculate the exponantttttt

[@monlivreetmoi]

Big up

[@mrhameedpasha8936]

Howvto calculate

[@victorkulminski2657]

Beauty

[@andrewnauman5290]

"calcalating" lol

[@barkbent4324]

boss