Don't be fooled.....

TexasOaks · 02-04-2008, 01:24 PM

Geometric Returns vs Arithmetic Returns

Lets say a fund company has an average of 100% the first year and then loses 50% the next year what was the return. The company might report a arithmetic return of 25% (100+-50/2 = 25%) which is technically right but don't be fooled.

Let's plus in some numbeers... an example.... lets say you invest $10 and it doubles (your 100% return) into $20 the first year and then your investment loses 50% the next year back down to $10. The fund publishes a arithmetic return of 25% for the 2 year return.

Lets look at it from another perspective companies might not want you to know. We will now look at the geometric return which is 0. Let's prove it... the geometric return would be calculated as follows ((1+100%) * (1+-50%))^(1/2) -1 = 0 or ((2 * .5) ^.5) -1 = 0.

DON'T BE FOOLED AGAIN.....

rstlne · 02-04-2008, 01:33 PM

An easy way to verify the mutual fund's claims is to check the numbers against a third-party source such as Morningstar, which provides annualized trailing returns over 3, 5, and 10-year periods.

Another thing to watch out for is a fund's 5-year trailing return no longer includes its performance during the 2001-2002 bear market so that number is now higher than it would be if performance is measured over a full market cycle. Be sure to check a fund's 2001-2002 returns before buying.

TexasOaks · 02-05-2008, 07:26 AM

Morning star is great to look at funds but there are all kinds of financial opportunities people like to look at so beware.. (aka there isn't a help book to analyze what your looking at)

02-04-2008, 01:24 PM	#1
TexasOaks Junior Member Join Date: Jan 2008 Location: Denton, Texas Posts: 28 Reputation: (11)	Don't be fooled..... Geometric Returns vs Arithmetic Returns Lets say a fund company has an average of 100% the first year and then loses 50% the next year what was the return. The company might report a arithmetic return of 25% (100+-50/2 = 25%) which is technically right but don't be fooled. Let's plus in some numbeers... an example.... lets say you invest $10 and it doubles (your 100% return) into $20 the first year and then your investment loses 50% the next year back down to $10. The fund publishes a arithmetic return of 25% for the 2 year return. Lets look at it from another perspective companies might not want you to know. We will now look at the geometric return which is 0. Let's prove it... the geometric return would be calculated as follows ((1+100%) * (1+-50%))^(1/2) -1 = 0 or ((2 * .5) ^.5) -1 = 0. DON'T BE FOOLED AGAIN.....

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02-04-2008, 01:33 PM	#2
rstlne Senior Member Join Date: Jan 2008 Location: New Jersey Posts: 364 Reputation: (115)	An easy way to verify the mutual fund's claims is to check the numbers against a third-party source such as Morningstar, which provides annualized trailing returns over 3, 5, and 10-year periods. Another thing to watch out for is a fund's 5-year trailing return no longer includes its performance during the 2001-2002 bear market so that number is now higher than it would be if performance is measured over a full market cycle. Be sure to check a fund's 2001-2002 returns before buying.

02-05-2008, 07:26 AM	#3
TexasOaks Junior Member Join Date: Jan 2008 Location: Denton, Texas Posts: 28 Reputation: (11)	Morning star is great to look at funds but there are all kinds of financial opportunities people like to look at so beware.. (aka there isn't a help book to analyze what your looking at)