ARITHMETIC MEAN RETURN Meaning and
Definition
-
ARITHMETIC MEAN RETURN, also known as the mean return, is a financial term used to describe the average rate of return of an investment over a specific period of time. It is calculated by summing the returns of the investment for each period and dividing that sum by the total number of periods.
The arithmetic mean return is a widely used measure of investment performance and is commonly used by investors, analysts, and portfolio managers to assess the average profitability of an investment over time. It provides a simple and straightforward way to evaluate the historical performance of an investment.
To calculate the arithmetic mean return, one must first gather the returns of the investment for each period. These returns could be expressed as a percentage or as a decimal. Then, the sum of these returns is divided by the total number of periods. The resulting value represents the average rate of return over the specified time period.
One important thing to consider when using the arithmetic mean return is that it assumes that the returns for each period are equal and that there is no compounding effect. This assumption may not always hold true in real-world scenarios, as investment returns can fluctuate significantly over time.
Overall, the arithmetic mean return is a useful tool for assessing the average performance of an investment over a specific period, but it should be considered in conjunction with other measures and factors to gain a comprehensive understanding of an investment's historical performance and future prospects.
