Arithmetic mean return
Principles of Finance glossary · Time Value of Money
Definition
The simple average of a series of returns.
Arithmetic mean return in plain English
The arithmetic mean return is just the plain average you already know — add up the yearly returns and divide by how many years there were. If an investment gained 10% one year and lost 4% the next, the arithmetic mean is (10% + (-4%))/(2) = 3%. It's the best simple guess for what a SINGLE typical year might look like going forward, which is why analysts use it for forecasting. Just know it slightly overstates how your money actually grew over multiple years (that's a different average called the geometric mean), because gains and losses compound rather than simply add.
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