The document explains the geometric mean return (GMR) as a method for calculating the average rate of return on an investment compounded over multiple time periods, presenting it as a more reliable measure than the arithmetic mean. It outlines the GMR formula and provides a numerical example demonstrating how to compute the GMR using different annual returns. Ultimately, the GMR provides an accurate representation of investment returns, factoring in the compounding effect over time.

1. GEOMETRIC MEAN
RETURN
CORPORATE FINANCE

2. INTRODUCTION
• Geometric Mean Return is used for computation of average rate of
return per period on an investment made, compounded over multiple
time periods
• The reliable way of calculating return from investment
• It takes into account the compounding effect that occurs over a period
of time
• Geometric mean thus gives a more accurate figure of investment return
as compared to the arithmetic return

3. FORMULA
• GMR Formula -
n 1 + 𝑟1 1 + 𝑟2 1 + 𝑟3 … . . (1 + 𝑟𝑛) − 1
• r = rate of return
• n = number of periods
• Relative return = (1+r)

4. EXAMPLE
Year Return % Relative Return
1 15% 1.15
2 20% 1.20
3 -11% 0.89
4 27% 1.27
GMR= 4 1.15 1.20 0.89 (1.27) − 1 = 0.1175 = 11.75%

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