What is the geometric return?

• A. It is the compounded rate of return across multiple periods
• B. It is the simple average of periodic returns
• C. It ignores reinvestment of earnings
• D. It is always higher than arithmetic return

Answer: (A)

Geometric return hinges on the compounding effect across multiple periods. It represents the rate that, if earned in each period and reinvested, would grow the initial investment to its final value after those periods. You compute it by multiplying the period growth factors together, (1+R1)×(1+R2)×…×(1+Rn), and then subtracting 1 (or taking the nth root and subtracting 1 for an annualized rate). This captures how gains build on gains over time.

This differs from a simple average of periodic returns, which just adds returns and divides by the number of periods and ignores how money actually grows through reinvestment. The geometric measure explicitly assumes reinvestment, reflecting the true growth path rather than a straight average. And it’s not always higher than the arithmetic average; it’s typically lower, equal only if every period has the same return.