QM Deck 1 – Rates and Returns · Flashcards

Question

What is the formula for the geometric mean return over $n$ periods?

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Answer

$i g [(1 + R_{1}) im ese x t ... im es (1 + R_{n}) i g]^{1/ n} - 1$ .

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Question

How do you annualize a holding period return earned over a fraction of a year?

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Answer

$e x t A nn u a l i z e d = (1 + H P R)^{c / n} - 1$ .

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Question

Why is the geometric mean preferred to the arithmetic mean for multi-period investment performance?

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Answer

It captures compounding across periods.

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Question

How is time-weighted return computed from sub-period returns?

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Answer

Chain-link sub-period HPRs using the geometric mean.

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