What is the geometric return often referred to as?

The geometric return is often referred to as the Compound Annual Growth Rate (CAGR). This is because the geometric return measures the rate at which an investment grows over time, taking into account the effects of compounding. Whereas the average annual return simply adds up returns and divides them by the number of years, the geometric return reflects the investment’s performance over multiple periods, accounting for the impact of volatility.

The CAGR specifically gives a smoothed annual rate of return over a specified period, allowing investors to understand the true growth of their investment as it factors in the compounding of returns year over year. This is particularly useful for assessing long-term investments and comparing different investment options that may have varying levels of volatility.

Standard deviation, on the other hand, measures the volatility of an investment’s returns but does not provide a return itself. Net Present Value (NPV) is a valuation method used to determine the profitability of an investment by calculating the present value of its future cash flows. While the Average Annual Return provides a simple arithmetic mean of yearly returns, it does not accurately convey the compounding effect that the geometric return does.