Member-only story
We Have Been Averaging Returns All Wrong; This Is What We Should Be Looking For Instead!
Why we should be looking more at geometric mean instead of arithmetic mean. (Python & MS Excel examples)
If you are anything like me, you probably are using the simple way of averaging when looking for expected values within time series data, such as returns on investments.
Or even further, you might not even know there are multiple forms of calculating averages, and the one you have most likely been using is called the arithmetic average or mean.
We only need to be honest, who does not recognize this formula:
For most, although it might not be clear, the formal name is Arithmetic Average or Arithmetic Mean and it is simple enough that it does not need too much explanation.
This could be due to our childhood and our good old days at school. Days when we spend countless days solving problems in math classes and homework assignments.
And by advancing in your school and college ladder, most likely you remain using this trusty formula for everything and only renaming it as you change courses from average to mean, to the expected value, etc.
