Investment basics XVII What is the return on your investment

Abstract

This paper addresses the issue of what the appropriate methodology is for calculating holding period returns on risky investments in order to correctly specify the return to the investor and permit of inter-investment comparison especially when holding periods of different lengths are involved.The arithmetic and geometric means are presented as alternative specifications for the returns. The geometric mean is shown to be the correct method of calculating average holding period returns. An example of the degree of misspecification which can occur when using the arithmetic mean is drawn from the returns of companies on the JSE.