When interested in the rate of return performance of an investment over time it is best to use:
A) the arithmetic mean.
B) the geometric mean.
C) either the arithmetic mean or the geometric mean.
D) neither the arithmetic mean nor the geometric mean.

Question

Quizplus · Accepted Answer

The geometric mean is best for measuring the rate of return over time because it accounts for the compounding effect of investments, unlike the arithmetic mean which could overestimate performance by not considering the impact of volatility and the sequence of returns.

When Interested in the Rate of Return Performance of an Investment