Geometric mean
InvestingDefinition
The compound average return of a series. Always less than or equal to arithmetic average. The relevant metric for long-run portfolio growth.
(Arithmetic mean − Geometric mean) ≈ ½ × variance. So a strategy with 10% arithmetic average and 20% volatility delivers ~8% compound return. Volatility drag is the central reason why preserving capital in drawdowns matters more than chasing maximal arithmetic return.
(Arithmetic mean − Geometric mean) ≈ ½ × variance. So a strategy with 10% arithmetic average and 20% volatility delivers ~8% compound return. Volatility drag is the central reason why preserving capital in drawdowns matters more than chasing maximal arithmetic return.
Formula
Geometric mean = (∏(1+r_i))^(1/n) − 1
Example
A series of returns: +50%, -33%. Arithmetic mean = +8.5%. Geometric mean = 0% (you ended where you started: 1.50 × 0.67 = 1.005).