using multiplicative returns

Do you know of an example where this is not the right approach? I see lots of examples where both are used, so I figured that if I use multiplicative everywhere, I’m in. Is there a guideline on this?

Are you refering to arithmatic vs geometric? I use arithmatic for Individual Investors, geomertic for everything else.


I always used geometric, but I’ve noticed twice now where CFAI used additive only. And in one case you couldn’t do the rest of the problem if you used geometric (*Spoiler Below*). Really ticked me off. But most of the time I’ve seen both for answers. I’m still partial go geometric because I think its more right, but I’m starting to think about switching over. --------------------------- CFAI 2008 AM

In general, if it’s one period then you should use arithmetic and if it’s more than one period you should use geometric.

we’re referring to one period, multiple inputs, right? real return +/* inflation +/* mgmt fees or are we talking about something else?

yeah that was what I meant. say you want 6% plus inflation of 2% and management fees of 1%. Is that 9% or 1.06 x 1.02 x 1.01 ?