Question 1

What is the difference between arithmetic and geometric mean?

Accepted Answer

Arithmetic mean is the simple average of returns. Geometric mean (CAGR) accounts for compounding and gives the true annualized return. Geometric mean is always lower than or equal to arithmetic mean.

Question 2

Which return should I use?

Accepted Answer

Use geometric mean (CAGR) for multi-year investment performance. Use arithmetic mean for single-period analysis or when returns are independent.

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