Geometric Mean vs Arithmetic Mean vs Dollar Weighted Return Simply Explained. CFA Exam
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-07-27

In this video, I will cover geometric mean vs arithmetic mean. The geometric mean is a mean or average, which indicates the central tendency or typical value of a set of numbers by using the product of their values. Arithmetic mean is the average of a set of numerical values, calculated by adding them together and dividing by the number of terms in the set.

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The holding-period return (HPR) on a share of stock reflects both the increase (or decrease) in the price of the share over the investment period as well as any dividend income the share has provided.
Arithmetic average is the sum of returns in each period divided by the number of periods.
 The geometric average of the quarterly returns is equal to the single per-period return that would give the same cumulative performance as the sequence of actual returns.
DOLLAR-WEIGHTED RETURN To account for varying amounts under management, we treat the fund cash flows as we would a capital budgeting problem in corporate finance and compute the portfolio manager’s internal rate of return (IRR).