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Article: Looking for the Mean: Using five-year rolling returns to calculate equity performance reduces volatility and presents a more accurate picture of the central tendency of returns.
- Article from:
- Financial Planning
- Article date:
- September 1, 2004
CopyrightCOPYRIGHT 2004 SourceMedia, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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One topic that always intrigues investors, advisers, and market analysts alike is how to determine the "central tendency" of domestic equity returns. Calculating the mean return over some period of time is a typical approach.
Over the past 33 years, the mean return (geometric rather than arithmetic) of the U.S. equity market-as measured using the Wilshire 5000 Total Market Index-was 11.6%. Note that the geometric mean is always lower than (and sometimes equal to) its arithmetic mean cousin, which was 13.1% in this case, over the same time time period.
The annualized returns reported by fund companies and data providers are always computed as a geometric ...