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Knowledge Base » Understanding ‘Expected Returns’: Arithmetic and Geometric Risk Premia

Understanding ‘Expected Returns’: Arithmetic and Geometric Risk Premia

Document ID: 2006-350 (previously 2006/011)
Published on: 1st February 2006
Author: Colin Holmes

The term "expected return" is ambiguous and, as a result, is the source of endless confusion. In this note we give two separate definitions of the expected return, via the "arithmetic" and "geometric" mean returns.

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