Hi Steve, in case you still care, the geometric mean using just the return, 'R', won't work out the the same as 1+R, in theory or practice.
Try returns of 10%, 20%, and 30% (geomean is in Excel )
geomean(.1, .2, .3) ~= 0.182
geomean(1.1, 1.2, 1.3)-1 ~= 0.197, or 19.7%
Apply to an $100 investment over 3 periods:
$100 *1.1*1.2*1.3 = $172
$100*1.197*1.197*1.197 =$172
1.182 (or 0.182 for that matter) would not get you the right number.
Now, if you're seeing people calculating the arithmetic mean of positive returns for a different purpose, then it doesn't matter, you don't have to add the 1.
Hi Steve, in case you still care, the geometric mean using just the return, 'R', won't work out the the same as 1+R, in theory or practice.
Try returns of 10%, 20%, and 30% (geomean is in Excel )
geomean(.1, .2, .3) ~= 0.182
geomean(1.1, 1.2, 1.3)-1 ~= 0.197, or 19.7%
Apply to an $100 investment over 3 periods:
$100 *1.1*1.2*1.3 = $172
$100*1.197*1.197*1.197 =$172
1.182 (or 0.182 for that matter) would not get you the right number.
Now, if you're seeing people calculating the arithmetic mean of positive returns for a different purpose, then it doesn't matter, you don't have to add the 1.