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Mean return for investors is the average expected return of an investment or portfolio. Mean return is usually used to connote average probability-weighted return on an arithmetic mean basis. Summing the product of return probabilities and returns and taking the weighted average of that sum gives you the mean return. For capital budgeting finance, mean return has a similar formula. Mean return in capital budgeting is calculated by the maximum risk-tolerance weighted return instead of the probability. Some people incorrectly define mean return as average monthly return, but mean return would only be so when the period averaged was exactly a year and the probability weights were all the same. Mean return is a more general term applicable to any time frame. Geometric mean return is also used by investors to calculate proportional change in wealth over a specified time horizon. Geometric mean return analysis shows at what rate wealth grew as if at a constant rate. Mean return usually connotes arithmetic mean and the word “geometric” is often added when geometric mean return is applied to illustrate portfolio return. |
