A portfolio manager announces that the average of the returns realized in each year of the last 10 years is 20% per annum. In what respect is this statement misleading?
From my derivative math class.
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Because average returns don't reflect compounding.
Consider a Portfolio worth $100 that is worth $300 after year one and stays at that number for 10 years. Or, consider a portfolio that makes you 20% every year.
Both have average returns of 20%, one portfolio is worth a whole lot more after 10 years.
CAGR would be the true story teller...
(Ending Value/Beginning Value^1/No. of years) subracted from 1.
have to love that CAGR
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