You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?
A) dollar-weighted return
B) geometric average return
C) arithmetic average return
D) index return

Question

Quizplus · Accepted Answer

The geometric average return is the best measure of the actual average historical performance as it accounts for the compounding effect of returns and is a more accurate measure of what investors actually earn. The dollar-weighted return can be skewed by the timing and size of cash flows, while the arithmetic average return does not account for compounding. The index return may be useful for benchmarking purposes but does not reflect the actual performance of the chosen investments.

You Have Calculated the Historical Dollar-Weighted Return, Annual Geometric Average