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A requiem for the use of the geometric mean in evaluating portfolio performance

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  • Spyros Missiakoulis
  • Dimitrios Vasiliou
  • Nikolaos Eriotis

Abstract

Although the geometric mean procedure is very popular among financial analysts, it is shown that when it is applied on rates of returns for evaluating portfolio performance it does not produce efficient results. Valuable past performance information is ignored since the geometric mean procedure applied on rates of returns uses only three specific pieces of information, namely the initial value, the terminal value and the total number of time periods under evaluation.

Suggested Citation

  • Spyros Missiakoulis & Dimitrios Vasiliou & Nikolaos Eriotis, 2007. "A requiem for the use of the geometric mean in evaluating portfolio performance," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(6), pages 403-408.
  • Handle: RePEc:taf:apfelt:v:3:y:2007:i:6:p:403-408
    DOI: 10.1080/17446540601018964
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    References listed on IDEAS

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    1. Ian Cooper, 1996. "Arithmetic versus geometric mean estimators: Setting discount rates for capital budgeting," European Financial Management, European Financial Management Association, vol. 2(2), pages 157-167.
    2. Eugene F. Fama & Kenneth R. French, 1999. "The Corporate Cost of Capital and the Return on Corporate Investment," Journal of Finance, American Finance Association, vol. 54(6), pages 1939-1967, December.
    3. Eric Jacquier & Alex Kane & Alan J. Marcus, 2005. "Optimal Estimation of the Risk Premium for the Long Run and Asset Allocation: A Case of Compounded Estimation Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 37-55.
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    Cited by:

    1. Missiakoulis, Spyros & Vasiliou, Dimitrios & Eriotis, Nikolaos, 2012. "Forecasting Performance with the Harmonic Mean: Long-Term Investment Horizons in Shanghai Stock Exchange," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 0(Number 1), pages 1-11, May.
    2. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite
      [The Theory of Fair Geometric Returns]
      ," MPRA Paper 87082, University Library of Munich, Germany.
    3. repec:spr:annopr:v:238:y:2016:i:1:d:10.1007_s10479-015-2035-x is not listed on IDEAS

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