Two formulas:
Annualized Expected Return = (Gross Spread/ Investment)*(360/ Inv. Period)
versus.
Annual Return = (ending value/beginning value)^(1/# of years) - 1
Which one is the appropriate one to use when comparing returns across asset classes? I understand that the top one does not incorporate compounding, while the bottom one does.
| +268 | UBS Layoffs (October 2026) | 80 | 11m |
| +120 | Do people still want to go PE? | 36 | 7h |
| +96 | UBS Tech layoff | 31 | 4h |
| +36 | Lazard hirevue | 11 | 1d |
| +36 | What Differentiates the Best Analysts as AI Improves? | 9 | 1d |
| +31 | How do YOU manage networking requests? | 6 | 49m |
| +28 | Quitting After First 4 months | 10 | 1d |
| +25 | Cornell Club T10 Rankings (UPDATED 10/2026) | 16 | 3h |
| +22 | MBB Pay Raises | 10 | 3h |
| +19 | Are target prospects getting dumber? | 11 | 4h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
http://itswhatyoukeep.hubpages.com/hub/Geometric-vs-Arithmetic-Rate-of-…
[quote=eriginal]http://itswhatyoukeep.hubpages.com/hub/Geometric-vs-Arithmetic-Rate-of-…]
Nice link..however, i was referring to how pms make investment decisions. The way i see it, the first formula would be used to compare possible investments by setting a one year investment horizon. For example, investment a yields a certain return in 6 months, where as investment B yields another return in 18 months....using the first formula i would know which investment is better and be able to gauge it against say one-year t-bonds....The second formula however, gives me a the "actual" average annualized return on a particular investment.
To rephrase, why utilize the first formula in the first place, when you can use the second to essentially get the same information?
Inventore et quas rerum occaecati odit autem. Rerum consectetur atque harum mollitia quisquam deleniti. Explicabo vel dolorem sit et. Eius nostrum quia rerum. Non voluptas necessitatibus qui. Quas cumque iure soluta vitae. Porro amet dolores sit.
Voluptates nostrum nihil adipisci unde blanditiis culpa. Qui non ut accusamus. Quod aut dignissimos cum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...