Are they all the same?
I would say the time-weighted rate of return is a specifc approach to the geometric mean rate of return where the returns that are being averaged together happen to be the HPYs that you have calculated for each period.
I believe the compounded rate of return is associated with the process of going from a net end result return and estimating what the average return for each period would be… so it is associated with the opposite process in relation to the other two you mentioned.
Hi,
No, compound rate of return is different to both, geometric rate.
Compound rate of return is one when return is of exponential nature, i.e. returns are calclated after interest rate is raised to a power. For example, lets say you invest, principle P in savings account in a bank and received a interest of r per year, and you invest for n periods (in years). So your compounded rate of return can be calculated as P*((1+r)^n).
Geometric rate of return is like an average of returns, with each return connected to the next unlike arithematic mean.
Time weighted return is geometric mean. Money weighted on the other hand is IRR.
Respectfully, you’re incorrect.
The geometric average return is the average compound return: the (constant) compound return that gives the same result as the (actual, not necessarily constant) returns compounded over the investment period.
I believe what I said is correct. Geometric mean is like an average ((a+b+c)/3) except where returns are connected to each other (a*b*c)^(1/3). I have tried to explain what you had later on, in a simpler way. Here’s an example if you still think I’m incorrect.
If you invest £10,000 over a period of 4 years with returns 10% (Y1), -3$ (Y2), 5% (Y3) and 8% (Y4). By year four, the monetary value of your investment would be £12099. The geometric mean ((1.1*0.97*1.05*1.08)^(1/4)-1) would give an average return of 4.88%. If you compound 4.88% four times (1.0488^4) you would get 1.209978, multiply this by the original investment amount of £10,000, you would get £12099.78.
You are correct in saying geometric rate of return is the average of the compound rate, which is obtained because returns (10%, -3%, 5%, & 8%) are compounded. In simple words, connected to each other unlike arithematic mean where returns are discrete (10+(-3)+5+8)/4 = 5%.
I hope this clarifies any confusion.
No, theyre different.